Table of Contents

 

 

 

**UNITED STATES**

**SECURITIES ANDEXCHANGE COMMISSION**

**Washington, D.C. 20549**

 

**Form 10-Q**

 

**x**      **QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)OF THE SECURITIES EXCHANGE ACT OF 1934**

** **

**For the quarterly period ended: June 30, 2009**

** **

**o**         **TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THESECURITIES EXCHANGE ACT OF 1934**

 

**Commissionfile number 0-02517**

 

**TOREADORRESOURCES CORPORATION**

(Exact name of registrant as specified in itscharter)

 

| **Delaware**                                    | ** ** | **75-0991164**                           |
|-------------------------------------------------|------------|------------------------------------------|
| (State or other jurisdiction

of incorporation) |       | (I.R.S. Employer

Identification Number) |

 

**c/o ToreadorHolding SAS**

**9rue Scribe**

**75009Paris, France**

(Address of principal executive office)

 

Registrant’s telephone number, including area code:**33 1 47 03 34 24**

 

Indicateby check mark whether the Registrant (i) has filed all reports required tobe filed by Section 13 or 15(d) of the Exchange Act during the past12 months (or for such shorter period that the Registrant was required tofile such reports), and (ii) has been subject to such filing requirementsfor the past 90 days.  Yes x No o

 

Indicateby check mark whether the registrant has submitted electronically and posted onits corporate Web site, if any, every Interactive Data File required to besubmitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 ofthis chapter) during the preceding 12 months (or for such shorter period thatthe registrant was required to submit and post such files).  Yes o No o

 

Indicateby check mark whether the Registrant is a large accelerated filer, anaccelerated filer, a non-accelerated filer or a smaller reporting company. Seedefinition of “large accelerated filer,” “accelerated filer” and “smallerreporting company” in Rule 12b-2 of the Exchange Act. 

 

| Large  accelerated filer o               |   | Accelerated  filer x         |
|-----------------------------------------------|--------|-----------------------------------|
|                                          |   |                              |
| Non-accelerated  filer o                 |   | Smaller  Reporting company o |
| (Do not check if a smaller reporting company) |   |                              |

 

Indicateby check mark whether the registrant is a shell company (as defined in Rule 12b-2of the Exchange Act).  Yes o No x

 

As of August 5,2009, there were 21,494,240 shares of common stock, par value $.15625 pershare, outstanding .

 

 

 

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**TOREADOR RESOURCESCORPORATION**

 

**TABLEOF CONTENTS**

 
| ** **                                  | **Page**                                                                                              |
|---------------------------------------------|-------------------------------------------------------------------------------------------------------|
|                                        |                                                                                                  |
| **PART I. FINANCIAL INFORMATION** |                                                                                                  |
| ** **                                  |                                                                                                  |
| Item 1.                                     | Financial  Statements (unaudited)                                                                     |   |
|                                        |                                                                                                  |   |
|                                        | Consolidated  Balance Sheets — June 30, 2009 and December 31, 2008                     | 1 |
|                                        |                                                                                                  |   |
|                                        | Consolidated  Statements of Operations — for the three months ended June 30, 2009 and  2008 | 2 |
|                                        |                                                                                                  |   |
|                                        | Consolidated  Statements of Operations — for the six months ended June 30, 2009 and  2008   | 3 |
|                                        |                                                                                                  |   |
|                                        | Consolidated  Statements of Cash Flows — for the six months ended June 30, 2009 and  2008   | 4 |
|                                        |                                                                                                  |   |
|                                        | Notes to Consolidated Financial Statements                                                            | 5 |
|                                        |                                                                                                  |   |
| Item 2.                                     | Management’s  Discussion and Analysis of Financial Condition and Results of Operations           | 19 |
|                                        |                                                                                                  |   |
| Item 3.                                     | Quantitative  and Qualitative Disclosures About Market Risk                                           | 36 |
|                                        |                                                                                                  |   |
| Item 4.                                     | Controls and  Procedures                                                                              | 36 |
|                                        |                                                                                                  |   |
| **PART II. OTHER INFORMATION**    |                                                                                                  |
| ** **                                  |                                                                                                  |
| Item 1.                                     | Legal Proceedings                                                                                     | 37 |
|                                        |                                                                                                  |   |
| Item 1A.                                    | Risk Factors                                                                                          | 37 |
|                                        |                                                                                                  |   |
| Item 4.                                     | Submission of  Matters to a Vote of Security Holders                                                  | 37 |
|                                        |                                                                                                  |   |
| Item 6.                                     | Exhibits                                                                                              | 37 |
|                                        |                                                                                                  |   |
| ** **                                  | **SIGNATURES**                                                                                        | 38 |

 

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**PART I.FINANCIAL INFORMATION**

 

**TOREADORRESOURCES CORPORATION**

 

**CONSOLIDATED BALANCE SHEETS**

 
| ** **                                                                                                         | ** ** | **June 30,********2009**                        | ** ** | **December 31,********2008** | ** ** |
|--------------------------------------------------------------------------------------------------------------------|------------|------------------------------------------------------|------------|-----------------------------------|------------|
| ** **                                                                                                         | ** ** | **(Unaudited)**                                      | ** ** | ** **                        | ** ** |
| ** **                                                                                                         | ** ** | **(In  thousands, except share and per share data)** | ** ** |
| **ASSETS**                                                                                                         |       |                                                 |       |                              |       |
| Current assets:                                                                                                    |       |                                                 |       |                              |       |
| Cash and cash equivalents                                                                                          |       | $                                                    | 16,186     |                              | $          | 19,457 |   |
| Accounts receivable                                                                                                |       | 2,037                                                |       | 2,350                             |       |
| Oil and natural gas properties, net, held for sale                                                                 |       | 14,986                                               |       | 74,739                            |       |
| Other assets held for sale                                                                                         |       | 12,733                                               |       | 5,914                             |       |
| Other                                                                                                              |       | 3,603                                                |       | 3,713                             |       |
| Total current assets                                                                                               |       | 49,545                                               |       | 106,173                           |       |
| Oil and natural gas properties, net, using  successful efforts method of accounting                                |       | 89,148                                               |       | 89,972                            |       |
| Investments                                                                                                        |       | 200                                                  |       | 200                               |       |
| Restricted cash                                                                                                    |       | 994                                                  |       | 2,922                             |       |
| Goodwill                                                                                                           |       | 3,898                                                |       | 3,838                             |       |
| Other assets                                                                                                       |       | 3,226                                                |       | 4,051                             |       |
|                                                                                                               |       | $                                                    | 147,011    |                              | $          | 207,156 |   |
|                                                                                                               |       |                                                 |       |                              |       |
| **LIABILITIES AND STOCKHOLDERS’  EQUITY**                                                                     |       |                                                 |       |                              |       |
| Current liabilities:                                                                                               |       |                                                 |       |                              |       |
| Accounts payable and accrued liabilities                                                                           |       | $                                                    | 6,338      |                              | $          | 10,001 |   |
| Liabilities held for sale                                                                                          |       | 9,502                                                |       | 7,631                             |       |
| Deferred lease payable                                                                                             |       | 102                                                  |       | 93                                |       |
| Current portion of long-term debt                                                                                  |       | —                                               |       | 30,000                            |       |
| Income taxes payable                                                                                               |       | 131                                                  |       | 4,217                             |       |
| Total current liabilities                                                                                          |       | 16,073                                               |       | 51,942                            |       |
|                                                                                                               |       |                                                 |       |                              |       |
| Long-term accrued liabilities                                                                                      |       | 504                                                  |       | 501                               |       |
| Deferred lease payable                                                                                             |       | 613                                                  |       | 665                               |       |
| Asset retirement obligations                                                                                       |       | 7,756                                                |       | 7,362                             |       |
| Deferred income tax liabilities                                                                                    |       | 13,414                                               |       | 13,851                            |       |
| Convertible senior notes                                                                                           |       | 63,592                                               |       | 80,275                            |       |
| Total liabilities                                                                                                  |       | 101,952                                              |       | 154,596                           |       |
| Commitments and contingencies                                                                                      |       |                                                 |       |                              |       |
| Stockholders’ equity:                                                                                         |       |                                                 |       |                              |       |
| Common stock, $0.15625 par value,  30,000,000 shares authorized; 21,494,240 and 20,984,360 shares issued |       | 3,358                                                |       | 3,279                             |       |
| Additional paid-in capital                                                                                         |       | 169,152                                              |       | 166,484                           |       |
| Accumulated deficit                                                                                                |       | (159,162                                             | )          | (151,169                          | )          |
| Accumulated other comprehensive income                                                                             |       | 34,245                                               |       | 36,500                            |       |
| Treasury stock at cost, 721,027 shares                                                                        |       | (2,534                                               | )          | (2,534                            | )          |
| Total stockholders’ equity                                                                                    |       | 45,059                                               |       | 52,560                            |       |
|                                                                                                               |       | $                                                    | 147,011    |                              | $          | 207,156 |   |

 

The accompanyingnotes are an integral part of these financial statements.

** **

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**TOREADOR RESOURCESCORPORATION**

 

**CONSOLIDATED STATEMENTS OF OPERATIONS**

 
| ** **                                                       | ** ** | **Three  Months Ended********June 30,** | ** ** |
|------------------------------------------------------------------|------------|----------------------------------------------|------------|
| ** **                                                       | ** ** | **2009**                                     | ** ** | **2008** | ** ** |
| ** **                                                       | ** ** | **(Unaudited)**                              | ** ** |
| ** **                                                       | ** ** | **(In  thousands, except per share data)**   | ** ** |
| Oil and natural gas sales                                        |       | $                                            | 4,504      |   | $ | 10,987 |   |
| Operating costs and expenses:                                    |       |                                         |       |   |   |
| Lease operating                                                  |       | 1,776                                        |       | 2,617 |   |
| Exploration expense                                              |       | 146                                          |       | 469 |   |
| Depreciation, depletion and amortization                         |       | 1,592                                        |       | 1,151 |   |
| General and administrative                                       |       | 5,703                                        |       | 4,683 |   |
| Loss on oil and gas derivative contracts                         |       | —                                       |       | 3,671 |   |
| Gain on sale of properties and other assets                      |       | (121                                         | )          | — |   |
| Impairment of oil and gas properties                             |       | —                                       |       | 2,282 |   |
| Total operating costs and expenses                               |       | 9,096                                        |       | 14,873 |   |
| Operating loss                                                   |       | (4,592                                       | )          | (3,886 | ) |
| Other (expense) income:                                          |       |                                         |       |   |   |
| Foreign currency exchange gain (loss)                            |       | (653                                         | )          | 7 |   |
| Gain on early extinguishment of debt                             |       | 3,370                                        |       | — |   |
| Interest and other income                                        |       | 325                                          |       | 178 |   |
| Interest expense, net of interest capitalized                    |       | (871                                         | )          | (895 | ) |
| Total other income (expense)                                     |       | 2,171                                        |       | (710 | ) |
| Loss before taxes                                                |       | (2,421                                       | )          | (4,596 | ) |
| Income tax (benefit) provision                                   |       | (691                                         | )          | 2,605 |   |
| Loss from continuing operations, net of income taxes             |       | (1,730                                       | )          | (7,201 | ) |
| Income (loss) from discontinued operations, net of  income taxes |       | 4,612                                        |       | (58,567 | ) |
| Income (loss) available to common shares                         |       | $                                            | 2,882      |   | $ | (65,768 | ) |
|                                                             |       |                                         |       |   |   |
| Basic income (loss) available to common shares per  share:       |       |                                         |       |   |   |
| From continuing operations, net of income taxes                  |       | $                                            | (0.09      | ) | $ | (0.36 | ) |
| From discontinued operations, net of income taxes                |       | 0.23                                         |       | (2.97 | ) |
|                                                             |       | $                                            | 0.14       |   | $ | (3.33 | ) |
|                                                             |       |                                         |       |   |   |
| Diluted income (loss) available to common shares per  share:     |       |                                         |       |   |   |
| From continuing operations, net of income taxes                  |       | $                                            | (0.09      | ) | $ | (0.36 | ) |
| From discontinued operations, net of income taxes                |       | 0.23                                         |       | (2.97 | ) |
|                                                             |       | $                                            | 0.14       |   | $ | (3.33 | ) |
|                                                             |       |                                         |       |   |   |
| Weighted average shares outstanding:                             |       |                                         |       |   |   |
| Basic                                                            |       | 20,416                                       |       | 19,742 |   |
| Diluted                                                          |       | 20,416                                       |       | 19,742 |   |

 

The accompanyingnotes are an integral part of these financial statements.

 

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**TOREADORRESOURCES CORPORATION**

 

**CONSOLIDATEDSTATEMENTS OF OPERATIONS**

 
| ** **                                              | ** ** | **Six  Months Ended********June 30,** | ** ** |
|---------------------------------------------------------|------------|--------------------------------------------|------------|
| ** **                                              | ** ** | **2009**                                   | ** ** | **2008** | ** ** |
| ** **                                              | ** ** | **(Unaudited)**                            | ** ** |
| ** **                                              | ** ** | **(In  thousands, except per share data)** | ** ** |
| Oil and natural gas sales                               |       | $                                          | 7,892      |   | $ | 19,837 |   |
| Operating costs and expenses:                           |       |                                       |       |   |   |
| Lease operating                                         |       | 3,564                                      |       | 4,515 |   |
| Exploration expense                                     |       | 610                                        |       | 1,138 |   |
| Depreciation, depletion and amortization                |       | 3,248                                      |       | 2,346 |   |
| General and administrative                              |       | 10,707                                     |       | 8,575 |   |
| Loss on oil and gas derivative contracts                |       | —                                     |       | 4,211 |   |
| Gain on sale of properties and other assets             |       | (121                                       | )          | — |   |
| Impairment of oil and gas properties                    |       | —                                     |       | 2,282 |   |
| Total operating costs and expenses                      |       | 18,008                                     |       | 23,067 |   |
| Operating loss                                          |       | (10,116                                    | )          | (3,230 | ) |
| Other (expense) income:                                 |       |                                       |       |   |   |
| Foreign currency exchange gain (loss)                   |       | (557                                       | )          | 1,017 |   |
| Gain on the early extinguishment of debt                |       | 3,370                                      |       | — |   |
| Interest and other income                               |       | 558                                        |       | 464 |   |
| Interest expense, net of interest capitalized           |       | (1,949                                     | )          | (2,015 | ) |
| Total other (expense) income                            |       | 1,422                                      |       | (534 | ) |
| Loss before taxes                                       |       | (8,694                                     | )          | (3,764 | ) |
| Income tax (benefit) provision                          |       | (769                                       | )          | 4,484 |   |
| Loss from continuing operations, net of income taxes    |       | (7,925                                     | )          | (8,248 | ) |
| Loss from discontinued operations, net of income  taxes |       | (69                                        | )          | (61,946 | ) |
| Loss available to common shares                         |       | $                                          | (7,994     | ) | $ | (70,194 | ) |
|                                                    |       |                                       |       |   |   |
| Basic loss available to common shares per share:        |       |                                       |       |   |   |
| From continuing operations, net of income taxes         |       | $                                          | (0.39      | ) | $ | (0.42 | ) |
| From discontinued operations, net of income taxes       |       | (0.00                                      | )          | (3.14 | ) |
|                                                    |       | $                                          | (0.39      | ) | $ | (3.56 | ) |
|                                                    |       |                                       |       |   |   |
| Diluted loss available to common shares per share:      |       |                                       |       |   |   |
| From continuing operations, net of income taxes         |       | $                                          | (0.39      | ) | $ | (0.42 | ) |
| From discontinued operations, net of income taxes       |       | (0.00                                      | )          | (3.14 | ) |
|                                                    |       | $                                          | (0.39      | ) | $ | (3.56 | ) |
|                                                    |       |                                       |       |   |   |
| Weighted average shares outstanding:                    |       |                                       |       |   |   |
| Basic                                                   |       | 20,271                                     |       | 19,699 |   |
| Diluted                                                 |       | 20,271                                     |       | 19,699 |   |

 

The accompanyingnotes are an integral part of these financial statements.

 

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**TOREADOR RESOURCESCORPORATION**

 

**CONSOLIDATED STATEMENTS OF CASH FLOWS**

 
| ** **                                                                                 | ** ** | **Six  Months Ended********June30,** | ** ** |
|--------------------------------------------------------------------------------------------|------------|--------------------------------------|------------|
| ** **                                                                                 | ** ** | **2009**                             | ** ** | **2008** | ** ** |
| ** **                                                                                 | ** ** | **(Unaudited)**                      | ** ** |
| ** **                                                                                 | ** ** | **(In  thousands)**                  | ** ** |
| Cash flows from operating activities:                                                      |       |                                 |       |   |   |
| Net loss                                                                                   |       | $                                    | (7,994     | ) | $ | (70,194 | ) |
| Adjustments to reconcile net loss to net cash  provided by (used in) operating activities: |       |                                 |       |   |   |
| Depreciation, depletion and amortization                                                   |       | 3,248                                |       | 19,969 |   |
| Amortization of deferred debt issuance costs                                               |       | 975                                  |       | — |   |
| Stock based compensation                                                                   |       | 2,831                                |       | 1,498 |   |
| Deferred income taxes benefit                                                              |       | (437                                 | )          | (4,415 | ) |
| Impairment of oil and natural gas properties in  Turkey                                    |       | 5,300                                |       | 53,479 |   |
| Impairment of oil and natural gas properties                                               |       | —                               |       | 2,282 |   |
| Gain on sale of properties and equipment                                                   |       | (121                                 | )          | — |   |
| Gain on sale of properties and other assets in  Romania                                    |       | (5,846                               | )          | — |   |
| Gain on early extinguishment of debt — convertible  notes                             |       | (3,370                               | )          | — |   |
| Loss on early extinguishment of debt — revolving  credit facility                     |       | 4,881                                |       | — |   |
| Unrealized loss on commodity derivatives                                                   |       | —                               |       | 1,761 |   |
| Increase in accounts receivable                                                            |       | (121                                 | )          | (2,185 | ) |
| (Increase) decrease in other current assets                                                |       | (2,883                               | )          | 369 |   |
| Increase in other assets                                                                   |       | (86                                  | )          | (180 | ) |
| Increase in accounts payable and accrued liabilities                                       |       | 1,289                                |       | 4,973 |   |
| Increase (decrease) in income taxes payable                                                |       | (4,087                               | )          | 3,970 |   |
| Net cash provided by (used in) operating activities                                        |       | (6,421                               | )          | 11,327 |   |
| Cash flows from investing activities:                                                      |       |                                 |       |   |   |
| Proceeds from sale of property and equipment                                               |       | 121                                  |       | — |   |
| Expenditures for property and equipment                                                    |       | (990                                 | )          | (6,974 | ) |
| Restricted cash                                                                            |       | 1,928                                |       | — |   |
| Proceeds from sale of oil and gas properties                                               |       | 50,000                               |       | — |   |
| Net cash provided by (used in) investing activities                                        |       | 51,059                               |       | (6,974 | ) |
| Cash flows from financing activities:                                                      |       |                                 |       |   |   |
| Repayment of convertible notes                                                             |       | (12,661                              | )          | — |   |
| Repayment of revolving credit facility                                                     |       | (36,372                              | )          | — |   |
| Proceeds from issuance of common stock                                                     |       | (82                                  | )          | 568 |   |
| Net cash provided by (used in) financing activities                                        |       | (49,115                              | )          | 568 |   |
| Net (decrease) increase in cash and cash equivalents                                       |       | (4,477                               | )          | 4,921 |   |
| Effects of foreign currency translation on cash and  cash equivalents                      |       | 1,206                                |       | (1,075 | ) |
| Cash and cash equivalents, beginning of period                                             |       | 19,457                               |       | 12,721 |   |
| Cash and cash equivalents, end of period                                                   |       | $                                    | 16,186     |   | $ | 16,567 |   |
| Supplemental disclosures:                                                                  |       |                                 |       |   |   |
| Cash paid during the period for interest, net of  interest capitalized                     |       | $                                    | 1,787      |   | $ | 3,330 |   |
| Cash paid during the period for income taxes                                               |       | $                                    | 4,032      |   | $ | 1,821 |   |

 

The accompanyingnotes are an integral part of these financial statements.

 

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**TOREADOR RESOURCESCORPORATION**

 

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

(UNAUDITED)

 

**NOTE 1 —BASIS OF PRESENTATION**

 

Theconsolidated financial statements of Toreador Resources Corporation andsubsidiaries (“Toreador,” “we,” “us,” “our,” or the “Company”) included hereinhave been prepared by the Company without audit, pursuant to the rules andregulations of the Securities and Exchange Commission (the “SEC”). They reflectall adjustments which are, in the opinion of management, necessary for a fairpresentation of the financial position and results of operations for theinterim periods, on a basis consistent with the annual audited financialstatements. All such adjustments are of a normal recurring nature, unless notedherein. Certain information and footnote disclosures normally included infinancial statements prepared in accordance with accounting principlesgenerally accepted in the United States have been condensed or omitted pursuantto such rules and regulations. However, the Company believes that thedisclosures contained herein are adequate to make the information presented notmisleading. These interim financial statements should be read in conjunction withthe consolidated financial statements and notes thereto included in the Company’sannual report on Form 10-K for the year ended December 31, 2008,which was initially filed with the SEC on March 16, 2009 and was amendedon April 16, 2009.  Certain prior-yearamounts have been reclassified and adjusted to conform to the 2009 presentationand to present the operations of Turkey and Romania as discontinued operations.The results of operations for interim periods are not necessarily indicative ofthe results to be expected for the full year.

 

On March 3, 2009, we completed the sale of a 26.75% interest inthe South Akcakoca Sub-Basin (SASB) project associated licenses located in theBlack Sea offshore Turkey to Petrol Ofisi for $55 million. In accordance withthe revised agreement announced on February 3, 2009, $50 million ofthe proceeds was paid by Petrol Ofisi on March 3, 2009, and the remaining$5 million is payable by Petrol Ofisi on September 1, 2009.

 

In accordance with the covenants of our revolving credit facility withthe International Finance Corporation, a portion of the proceeds of the sale ofour 26.75% interest in the SASB to Petrol Ofisi was used to fully repay the$36.4 million balance outstanding under the credit facility, which was comprisedof $30 million principal, $5.9 million of additional compensation dueunder the credit facility as a result of our repayment (such additionalcompensation calculated under the terms of the credit facility as a percentageof the Company’s earnings before interest, tax, depreciation, amortization andexploration expense) and $500,000 for accrued interest and fees.

 

Unless otherwise noted, amounts reported in tables are in thousands,except per unit data.

 

***New Accounting Pronouncements***

 

In December 2007,the Financial Accounting Standards Board (the “FASB”) issued Statement No. 141R,*“Business Combinations”* (“SFAS No. 141R”).Under SFAS No. 141R, a company is required to recognize the assetsacquired, liabilities assumed, contractual contingencies, and any contingentconsideration measured at their fair value at the acquisition date. It furtherrequires that research and development assets acquired in a businesscombination that have no alternative future use are to be measured at theiracquisition-date fair value and then immediately charged to expense, and thatacquisition-related costs are to be recognized separately from the acquisitionand expensed as incurred. Among other changes, this statement also requiresthat “negative goodwill” be recognized in earnings as a gain attributable tothe acquisition, and any deferred tax benefits resultant in a businesscombination be recognized in income from continuing operations in the period ofthe combination. SFAS No. 141R is effective for business combinationsfor 

 

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which the acquisitiondate is on or after the beginning of the first annual reporting periodbeginning after December 15, 2008. On January 1, 2009, the Companyadopted SFAS No. 141R and applies its provisions prospectively tobusiness combinations that occur after adoption. The adoption did not have anyimmediate effect on the financial statements and related disclosures.

 

In December 2007,the FASB issued Statement No. 160, *“Non-controllingInterests in**ConsolidatedFinancial Statements” —*an amendment of ARB No. 51 (“SFAS No. 160”).SFAS No. 160 amends ARB 51 to establish accounting and reportingstandards for the non-controlling interest in a subsidiary and for thedeconsolidation of a subsidiary. It clarifies that a non-controlling interestin a subsidiary, which is sometimes referred to as minority interest, is anownership interest in the consolidated entity that should be reported as equityin the consolidated financial statements. Among other requirements, thisstatement requires consolidated net income to be reported at amounts thatinclude the amounts attributable to both the parent and the non-controllinginterest. It also requires disclosure, on the face of the consolidated incomestatement, of the amounts of consolidated net income attributable to the parentand to the non-controlling interest. SFAS No. 160 is effective forfinancial statements issued for fiscal years, and interim periods within thosefiscal years, beginning after December 15, 2008. On January 1, 2009,the Company adopted SFAS No. 160 and there was no effect on thefinancial statements and related disclosures.

 

In February 2008,the FASB issued FSP No. 157-2 (“FASB No. 157-2”) to defer theeffective date of SFAS 157 to fiscal years beginning after November 15,2008, and the interim periods within such fiscal years, for all relatednonfinancial assets and liabilities, including nonfinancial assets andliabilities measured at fair value in a business combination; impairedproperty, plant and equipment; goodwill; and initial recognition of assetretirement obligations. We adopted FSP No. 157-2 effective January 1,2009 and the adoption did not have a significant effect on the financialpositions and results of operations. Refer to Note 14 for related disclosures.

 

In March 2008,the FASB issued Statement No. 161, *“Disclosuresabout**Derivative Instruments andHedging Activities”*— an Amendment of FASB Statement No. 133(“SFAS No. 161”). This statement changes the disclosure requirementsfor derivative instruments and hedging activities. Entities are required toprovide enhanced disclosures about (i) how and why an entity usesderivative instruments, (ii) how derivative instruments and related hedgeditems are accounted for under FASB Statement No. 133 and its relatedinterpretations, and (iii) how derivative instruments and related hedgeditems affect an entity’s financial position, financial performance, and cashflows. SFAS No. 161 is effective for annual periods beginning after November 15,2008. On January 1, 2009, the Company adopted SFAS No. 161 andthere was no effect on the financial statements and related disclosures.

 

In May 2008,the FASB issued Statement No. 162,*“TheHierarchy of Generally Accepted Accounting Principles**(“SFAS No. 162”).*The newstandard is intended to improve financial reporting by identifying a consistentframework, or hierarchy, for selecting accounting principles to be used inpreparing financial statements that are presented in conformity withU.S. generally accepted accounting principles for nongovernmentalentities. On January 1, 2009, the Company adopted SFAS No. 162and there was no effect on our financial statements and related disclosures.

 

In May 2008,the FASB issued FASB Staff Position (“FSP”) No. APB 14-1, “*Accounting for Convertible Debt Instruments That May Be Settled inCash Upon Conversion (Including Partial Cash Settlement)*” (“FSP APB No. 14-1”).  FSP APB No. 14-1 specifies that issuersof such instruments should separately account for the liability and equitycomponents in a manner that will reflect the entity’s nonconvertible debtborrowing rate when interest costs is recognized in subsequent periods.  FSP APB No. 14-1 is effective forfinancial statements issued for fiscal years beginning after December 15,2008 and interim periods within those fiscal years.  FSP ABP No. 14-1 should be appliedretrospectively for all periods presented. On January 1, 2009, the Company adopted FSP APB 14-1 and there wasno effect on our financial statements and related disclosures.

 

In November 2008,the FASB ratified EITF 08-6, “*Equity Method InvestmentAccounting Considerations*” (“EITF 08-6”) which clarifies how toaccount for certain transactions involving equity method investments.  The initial measurement, decreases in valueand changes in the level of ownership of the equity method investment areaddressed.  EITF 08-6 is effective on aprospective basis for our fiscal year beginning January 1, 2009 andinterim periods within the years.  Earlyapplication by an entity that has previously adopted an alternative accountingpolicy is not permitted.  On January 1,2009, the Company adopted EITF 08-06 and there was no effect on our financialstatements and related disclosures.

 

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On December 31,2008 the SEC issued the final rule, “*Modernization of Oil andGas Reporting*” (the “Final Reporting Rule”).  The Final Reporting Rule adoptsrevisions to the SEC’s oil and gas reporting disclosure requirements and iseffective for annual reports on Forms 10-K for years ending on or after December 31,2009.  The revisions are intended toprovide investors with a more meaningful and comprehensive understanding of oiland gas reserves to help investors evaluate their investments in oil and gascompanies.  The amendments are alsodesigned to modernize the oil and gas disclosure requirements to align themwith current practices and changes in technology.  Revised requirements in the Final Reporting Rule include,but are not limited to:

 

·                  Oil and gas reserves must be reportedusing the un-weighted arithmetic average of the first day of the month pricefor each month within a 12 month period, rather than year-end prices;

·                  Companies will be allowed to report, onan optional basis, probable and possible reserves;

·                  Non-traditional reserves, such as oil andgas extracted from coal and shales, will be included in the definition of “oiland gas producing activities;”

·                  Companies will be permitted to use newtechnologies to determine proved reserves, as long as those technologies havebeen demonstrated empirically to lead to reliable conclusions with respect toreserve volumes;

·                  Companies will be required to disclose,in narrative form, additional details on their proved undeveloped reserves (“PUDs”),including the total quantity of PUDs at year end, and any material changes toPUDs that occurred during the year, investments and progress made to convertPUDs to developed oil and gas reserves and an explanation of the reasons whymaterial concentrations of PUDs in individual fields or countries have remainedundeveloped for five years or more after disclosure as PUDs; and

·                  Companies will be required to report thequalifications and measures taken to assure the independence and objectivity ofany business entity or employee primarily responsible for preparing or auditingreserves estimate.

 

We are currently evaluating the potential impact of adopting the FinalReporting Rule.  The SEC has stated thatas it discusses the Final Reporting Rule with the FASB and InternationalAccounting Standards Board, the SEC will consider whether to delay thecompliance date.  Absent any change inthe effective date, we will comply with the disclosure requirements in ourannual report on Form 10-K for the year ended December 31, 2009.

 

In June 2009,the FASB issued SFAS No. 166, “Accounting for Transfers of FinancialAssets — an amendment of FASB Statement No. 140” (SFAS 166). SFAS 166removes the concept of a qualifying special-purpose entity from SFAS 140, “Accountingfor Transfers and Servicing of Financial Assets and Extinguishments ofLiabilities,” establishes a new “participating interest” definition that mustbe met for transfers of portions of financial assets to be eligible for saleaccounting, clarifies and amends the de-recognition criteria for a transfer tobe accounted for as a sale, and changes the amount that can be recognized as again or loss on a transfer accounted for as a sale when beneficial interestsare received by the transferor. Enhanced disclosures are also required toprovide information about transfers of financial assets and a transferor’scontinuing involvement with transferred financial assets. This statement mustbe applied as of the beginning of an entity’s first annual reporting periodthat begins after November 15, 2009, for interim periods within that firstannual reporting period, and for interim and annual reporting periodsthereafter. Earlier application is prohibited. We are currently evaluating thisnew statement.

 

In June 2009,the FASB issued SFAS No. 167, “Amendments to FASB Interpretation No. 46(R)”(SFAS 167). SFAS 167 amends FASB Interpretation No. 46 (revised December 2003),“Consolidation of Variable Interest Entities” (FIN 46(R)) to require anenterprise to qualitatively assess the determination of the primary beneficiaryof a variable interest entity (VIE) based on whether the entity (1) hasthe power to direct the activities of a VIE that most significantly impact theentity’s economic performance and (2) has the obligation to absorb lossesof the entity or the right to receive benefits from the entity that couldpotentially be significant to the VIE. Also, SFAS 167 requires an ongoingreconsideration of the primary beneficiary, and amends the events that triggera reassessment of whether an entity is a VIE. Enhanced disclosures are alsorequired to provide information about an enterprise’s involvement in a VIE.This statement shall be effective as of the beginning of each reporting entity’sfirst annual reporting period that begins after November 15, 2009, forinterim periods within that first annual reporting period, and for interim andannual reporting periods thereafter. Earlier application is prohibited. We arecurrently evaluating this new statement.

 

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In June 2009,the FASB issued SFAS No. 168, “The FASB Accounting Standards CodificationTM and the Hierarchy of Generally Accepted Accounting Principles — areplacement of FASB Statement No. 162” (SFAS 168). SFAS 168 replaces SFAS No. 162,“The Hierarchy of Generally Accepted Accounting Principles” and establishes the“FASB Accounting Standards Codification TM” (Codification) as the source ofauthoritative accounting principles recognized by the FASB to be applied bynongovernmental entities in the preparation of financial statements inconformity with generally accepted accounting principles in the United States.All guidance contained in the Codification carries an equal level of authority.On the effective date of SFAS 168, the Codification will supersede allthen-existing non-SEC accounting and reporting standards. All othernon-grandfathered non-SEC accounting literature not included in theCodification will become non-authoritative. SFAS 168 is effective for financialstatements issued for interim and annual periods ending after September 15,2009. We have evaluated this new statement, and have determined that it willnot have a significant impact on the determination or reporting of ourfinancial results.

 

In May 2009,the FASB issued Statement No. 165, “*Subsequent Events”*(SFASNo. 165*)*, to incorporate the accounting anddisclosure requirements for subsequent events into U.S. generally acceptedaccounting principles.  SFAS No. 165introduces new terminology, defines a date through which management must evaluatesubsequent events, and lists the circumstances under which an entity mustrecognize and disclose events or transactions occurring after the balance-sheetdate.  The Company adopted SFAS No. 165as of June 30, 2009, which was the required effective date.

 

On April 9, 2009,the FASB issued FASB Staff Position No. FAS 107-1 and APB 28-1, *“Interim Disclosures about Fair Value of Financial Instruments”*(FSP 107-1).  This FSP requiresdisclosures about financial instruments, including fair value, carrying amount,and method and significant assumptions used to estimate the fair value.  The Company adopted this standard as of June30, 2009.  Our adoption of this standarddid not affect our financial position or results of operations.

 

**NOTE 2 —CONCENTRATION OF CREDIT RISK AND ACCOUNTS RECEIVABLE**

 

Financialinstruments that potentially subject us to a concentration of credit riskconsist principally of cash, restricted cash and accounts receivable. We placeour cash with high credit quality financial institutions. We sell oil andnatural gas to various customers.

 

Weperiodically review the collectability of accounts receivable and record avaluation allowance for those accounts which are, in our judgment, unlikely tobe collected. We have not had any significant credit losses in the past and webelieve our accounts receivable are fully collectable.

 

Accountsreceivable consisted of the following:

 
| ** **                                    | ** ** | **June 30,********2009** | ** ** | **December 31,********2008** | ** ** |
|-----------------------------------------------|------------|-------------------------------|------------|-----------------------------------|------------|
| Accrued oil and natural gas sales receivables |       | $                             | 1,145      |                              | $          | 751 |   |
| Trade receivables                             |       | —                        |       | 724                               |       |
| Recoverable VAT                               |       | 493                           |       | 569                               |       |
| Other accounts receivable                     |       | 399                           |       | 306                               |       |
|                                          |       | $                             | 2,037      |                              | $          | 2,350 |   |

 

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**NOTE 3 — EARNINGS(LOSS) PER COMMON SHARE**

 

Thefollowing table reconciles the numerators and denominators of the basic anddiluted earnings (loss) per common share computation:

 
| ** **                                                                | ** ** | **Three  Months Ended********June 30,** | ** ** |
|---------------------------------------------------------------------------|------------|----------------------------------------------|------------|
| ** **                                                                | ** ** | **2009**                                     | ** ** | **2008** | ** ** |
| Basic earnings (loss) per share:                                          |       |                                         |       |   |   |
| Numerator:                                                                |       |                                         |       |   |   |
| Loss from continuing operations, net of income tax                        |       | $                                            | (1,730     | ) | $ | (7,201 | ) |
| Income (loss) from discontinued operations, net of  income tax            |       | 4,612                                        |       | (58,567 | ) |
| Income (loss) available to common shareholders                            |       | $                                            | 2,882      |   | $ | (65,768 | ) |
|                                                                      |       |                                         |       |   |   |
| Denominator:                                                              |       |                                         |       |   |   |
| Weighted average common shares outstanding                                |       | 20,416                                       |       | 19,742 |   |
|                                                                      |       |                                         |       |   |   |
| Basic earnings (loss) available to common  shareholders per share from:   |       |                                         |       |   |   |
| Continuing operations                                                     |       | $                                            | (0.09      | ) | $ | (0.36 | ) |
| Discontinued operations                                                   |       | 0.23                                         |       | (2.97 | ) |
|                                                                      |       | $                                            | 0.14       |   | $ | (3.33 | ) |
|                                                                      |       |                                         |       |   |   |
| Diluted earnings (loss) per share:                                        |       |                                         |       |   |   |
| Numerator:                                                                |       |                                         |       |   |   |
| Loss from continuing operations, net of income tax                        |       | $                                            | (1,730     | ) | $ | (7,201 | ) |
| Income (loss) from discontinued operations, net of  income tax            |       | 4,612                                        |       | (58,567 | ) |
| Income (loss) available to common shareholders                            |       | $                                            | 2,882      |   | $ | (65,768 | ) |
|                                                                      |       |                                         |       |   |   |
| Denominator:                                                              |       |                                         |       |   |   |
| Weighted average common shares outstanding                                |       | 20,416                                       |       | 19,742 |   |
| Conversion of 5.0% notes payable                                     |       | —                                       | (1)        | — | (1) |
| Diluted shares outstanding                                                |       | 20,416                                       |       | 19,742 |   |
|                                                                      |       |                                         |       |   |   |
| Diluted earnings (loss) available to common  shareholders per share from: |       |                                         |       |   |   |
| Continuing operations                                                     |       | $                                            | (0.09      | ) | $ | (0.36 | ) |
| Discontinued operations                                                   |       | 0.23                                         |       | (2.97 | ) |
|                                                                      |       | $                                            | 0.14       |   | $ | (3.33 | ) |

 

----

| (1) | Conversion of  the 5% Senior Convertible Notes would be anti-dilutive therefore, there  are no dilutive shares. |
|-----|----------------------------------------------------------------------------------------------------------------------|

 

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| ** **                                                     | ** ** | **Six  Months Ended********June 30,** | ** ** |
|----------------------------------------------------------------|------------|--------------------------------------------|------------|
| ** **                                                     | ** ** | **2009**                                   | ** ** | **2008** | ** ** |
| Basic loss per share:                                          |       |                                       |       |   |   |
| Numerator:                                                     |       |                                       |       |   |   |
| Loss from continuing operations, net of income tax             |       | $                                          | (7,925     | ) | $ | (8,248 | ) |
| Loss from discontinued operations, net of income tax           |       | (69                                        | )          | (61,946 | ) |
| Loss available to common shareholders                          |       | $                                          | (7,994     | ) | $ | (70,194 | ) |
|                                                           |       |                                       |       |   |   |
| Denominator:                                                   |       |                                       |       |   |   |
| Weighted average common shares outstanding                     |       | 20,271                                     |       | 19,699 |   |
|                                                           |       |                                       |       |   |   |
| Basic loss available to common shareholders per  share from:   |       |                                       |       |   |   |
| Continuing operations                                          |       | $                                          | (0.39      | ) | $ | (0.42 | ) |
| Discontinued operations                                        |       | (0.00                                      | )          | (3.14 | ) |
|                                                           |       | $                                          | (0.39      | ) | $ | (3.56 | ) |
|                                                           |       |                                       |       |   |   |
| Diluted loss per share:                                        |       |                                       |       |   |   |
| Numerator:                                                     |       |                                       |       |   |   |
| Loss from continuing operations, net of income tax             |       | $                                          | (7,925     | ) | $ | (8,248 | ) |
| Loss from discontinued operations, net of income tax           |       | (69                                        | )          | (61,946 | ) |
| Loss available to common shareholders                          |       | $                                          | (7,994     | ) | $ | (70,194 | ) |
|                                                           |       |                                       |       |   |   |
| Denominator:                                                   |       |                                       |       |   |   |
| Weighted average common shares outstanding                     |       | 20,271                                     |       | 19,699 |   |
| Conversion of 5.0% notes payable                          |       | —                                     | (1)        | — | (1) |
| Diluted shares outstanding                                     |       | 20,271                                     |       | 19,699 |   |
|                                                           |       |                                       |       |   |   |
| Diluted loss available to common shareholders per  share from: |       |                                       |       |   |   |
| Continuing operations                                          |       | $                                          | (0.39      | ) | $ | (0.42 | ) |
| Discontinued operations                                        |       | (0.00                                      | )          | (3.14 | ) |
|                                                           |       | $                                          | (0.39      | ) | $ | (3.56 | ) |

 

----

| (1) | Conversion of  the 5% Senior Convertible Notes would be anti-dilutive therefore, there  are no dilutive shares. |
|-----|----------------------------------------------------------------------------------------------------------------------|

 

**NOTE 4 —COMPREHENSIVE INCOME (LOSS)**

 

Thefollowing table presents the components of comprehensive income (loss), net ofrelated tax:

 
| ** **                               | ** ** | **Three  Months Ended********June 30,** | ** ** | **Six  Months Ended********June 30,** | ** ** |
|------------------------------------------|------------|----------------------------------------------|------------|--------------------------------------------|------------|
| ** **                               | ** ** | **2009**                                     | ** ** | **2008**                                   | ** ** | **2009** | ** ** | **2008** | ** ** |
| Net  Income (loss)                       |       | $                                            | 2,882      |                                       | $          | (65,768 | ) | $ | (7,994 | ) | $ | (70,194 | ) |
| Foreign  currency translation adjustment |       | 3,808                                        |       | (208                                       | )          | (2,255 | ) | 4,843 |   |
| Comprehensive  income (loss)             |       | $                                            | 6,690      |                                       | $          | (65,976 | ) | $ | (10,249 | ) | $ | (65,351 | ) |

 

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**NOTE 5 — LONG-TERMDEBT**

 

Long-termdebt consisted of the following:

 
| ** **                                                             | ** ** | **June 30,********2009** | ** ** | **December 31,********2008** | ** ** |
|------------------------------------------------------------------------|------------|-------------------------------|------------|-----------------------------------|------------|
| Secured revolving facility with the International  Finance Corporation |       | $                             | —     |                              | $          | 30,000 |   |
| Convertible senior notes                                               |       | 63,592                        |       | 80,275                            |       |
|                                                                   |       | 63,592                        |       | 110,275                           |       |
| Less: current portion                                                  |       | —                        |       | 30,000                            |       |
|                                                                   |       | $                             | 63,592     |                              | $          | 80,275 |   |

 

**CONVERTIBLESENIOR NOTES DUE OCTOBER 1, 2025**

 

On September 27,2005, we issued $75 million of Convertible Senior Notes due October 1,2025 (“Notes”) to qualified institutional buyers pursuant to Rule 144A ofthe Securities Act of 1933, as amended (the “Securities Act”). The Company alsogranted the initial purchasers the option to purchase an additional$11.25 million aggregate principal amount of Notes to coverover-allotments. The over-allotment option was exercised on September 30,2005. The total principal amount of Notes issued was $86.25 million andtotal net proceeds were approximately $82.2 million. We incurredapproximately $4.1 million of costs associated with the issuance of theNotes; these costs have been recorded in other assets on the balance sheet andare being amortized to interest expense using the straight-line interest ratemethod over the term of the Notes.

 

Thenet proceeds were used for general corporate purposes, including funding aportion of the Company’s 2005 and 2006 exploration and development activities.

 

TheNotes bear interest at a rate of 5% per annum and can be converted into commonstock at an initial conversion rate of 23.3596 shares of common stock per$1,000 principal amount of Convertible Senior Notes, subject to adjustment(equivalent to a conversion price of approximately $42.81 per share). We mayredeem the Convertible Senior Notes, in whole or in part, on or after October 6,2008, and prior to October 1, 2010, for cash at a redemption price equalto 100% of the principal amount of Convertible Senior Notes to be redeemed,plus any accrued and unpaid interest, if the closing price of our common stockexceeds 130% of the conversion price over a specified period. On or after October 1,2010, we may redeem the Convertible Senior Notes, in whole or in part, at aredemption price equal to 100% of the principal amount of Convertible SeniorNotes to be redeemed, plus any accrued and unpaid interest, irrespective of theprice of its common stock. Holders may convert their Convertible Senior Notesat any time prior to the close of business on the business day immediatelypreceding their stated maturity, and holders may, upon the occurrence ofcertain fundamental changes, and on October 1, 2010, October 1, 2015,and October 1, 2020, require us to repurchase all or a portion of theirConvertible Senior Notes for cash in an amount equal to 100% of the principalamount of such Convertible Senior Notes, plus any accrued and unpaid interest.

 

In 2008, we repurchased $6 million in principal amountof the Notes on the open market and through privately negotiated transactionsfor $5.3 million plus accrued interest of $109,347.  Additionally, we expensed $241,965 of prepaidloan fees attributable to the repurchased Notes.  This resulted in a $458,535 gain on the earlyextinguishment of debt.

 

In April 2009, we repurchased $16.7 million principal amount ofthe Notes on the open market and through privately negotiated transactions for$12.7 million plus accrued interest and prepaid loan fees of $650,000.  This repurchase resulted in a gain of $3.4million on the early extinguishment of debt which was recorded in the secondquarter of 2009.  We intend to continueto buy back a portion of the currently outstanding Notes in the open market orin privately negotiated transactions, subject to market conditions, applicablelegal requirements and other factors.

 

**SECUREDREVOLVING FACILITY WITH THE INTERNATIONAL FINANCE CORPORATION**

 

On December 28,2006, we entered into a loan and guarantee agreement with International FinanceCorporation. The loan and guarantee agreement provided for a $25 millionfacility which was a secured revolving facility with a maximum facility amountof $25 million which maximum facility amount would have increased to $40million if 

 

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the projected totalborrowing base amount exceeds $50 million. The $25 million facility funded on March 2,2007. The loan and guarantee agreement also provided for an unsecured $10million facility which funded on December 28, 2006.  Both the $25 million facility and the $10million facility were to fund our operations in Turkey and Romania.

 

On March 3,2009, we repaid and retired the facilities with the International FinanceCorporation. The total amount of the payment was $36.4 million, which wascomprised of $30 million principal, $5.9 million additional compensation dueunder the credit facility as a result of our repayment (such additionalcompensation calculated under the terms of the credit facility as a percentageof the Company’s earnings before interest, tax, depreciation, amortization andexploration expense) and $500,000 for accrued interest and fees.  As a result of the early extinguishment, werecorded a loss of $4.9 million for the period ended June 30, 2009 whichwas recorded in discontinued operations.

 

**NOTE 6 —ASSET RETIREMENT OBLIGATIONS**

 

Weaccount for our asset retirement obligations in accordance with Statement No. 143,Accounting for Asset Retirement Obligations (“SFAS No. 143”), whichrequires us to record the fair value of a liability for an asset retirementobligation in the period in which it is incurred. When the liability isinitially recorded, the entity capitalizes the cost by increasing the carryingamount of the related long-lived asset. Over time, the liability is accreted toits present value each period, and the capitalized cost is depreciated over theuseful life of the related asset. Upon settlement of the liability, we eithersettle the obligation for its recorded amount or incur a gain or loss uponsettlement.

 

Thefollowing table summarizes the changes in our asset retirement liability(excluding the asset retirement obligations held for sale) during the sixmonths ended June 30, 2009 and the year ended December 31, 2008:

 
| ** **                                  | ** ** | **Six  Months  Ended June 30,  2009** | ** ** | **Year  Ended  December 31,  2008** | ** ** |
|---------------------------------------------|------------|--------------------------------------------|------------|------------------------------------------|------------|
| Asset retirement obligation January 1  |       | $                                          | 7,362      |                                     | $          | 6,325 |   |
| Asset retirement accretion expense          |       | 296                                        |       | 357                                      |       |
| Foreign currency exchange gain              |       | 98                                         |       | (389                                     | )          |
| Change in estimates                         |       | —                                     |       | 1,306                                    |       |
| Property additions                          |       | —                                     |       | 221                                      |       |
| Property dispositions                       |       | —                                     |       | (458                                     | )          |
| Asset retirement obligation at June 30 |       | $                                          | 7,756      |                                     | $          | 7,362 |   |

 

**NOTE 7 —GEOGRAPHIC OPERATING SEGMENT INFORMATION**

 

Wehave operations in only one industry segment, the oil and natural gasexploration and production industry. We are structured along geographicoperating segments or regions.  Duringthe current period we reclassified our operations in Turkey and Romania todiscontinued operations (See Note 12). As a result, we have continuing operations in the United States, Franceand Hungary.

 

Thefollowing tables provide the geographic operating segment data required byStatement of Financial Accounting Standards No. 131, “Disclosure aboutSegments of an Enterprise and Related Information”.

 
| ** **              | ** ** | **Three  Months Ended June 30, 2009** | ** ** |
|-------------------------|------------|--------------------------------------------|------------|
| ** **              | ** ** | **United  States**                         | ** ** | **France** | ** ** | **Hungary** | ** ** | **Total** | ** ** |
| Revenues                |       | $                                          | 75         |   | $ | 4,429 |   | $ | — |   | $ | 4,504 |   |
| Costs and expenses      |       | 4,587                                      |       | 4,160 |   | 349 |   | 9,096 |   |
| Operating income (loss) |       | $                                          | (4,512     | ) | $ | 269 |   | $ | (349 | ) | $ | (4,592 | ) |
|                    |       |                                       |       |   |   |   |   |   |   |
| ** **              | ** ** | **Three  Months Ended June 30, 2008** | ** ** |
| ** **              | ** ** | **United  States**                         | ** ** | **France** | ** ** | **Hungary** | ** ** | **Total** | ** ** |
| Revenues                |       | $                                          | 16         |   | $ | 10,971 |   | $ | — |   | $ | 10,987 |   |
| Costs and expenses      |       | 10,505                                     |       | 4,197 |   | 171 |   | 14,873 |   |
| Operating income (loss) |       | $                                          | (10,489    | ) | $ | 6,774 |   | $ | (171 | ) | $ | (3,886 | ) |

 

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** **
| ** **              | ** ** | **Six  Months Ended June 30, 2009** | ** ** |
|-------------------------|------------|------------------------------------------|------------|
| ** **              | ** ** | **United  States**                       | ** ** | **France** | ** ** | **Hungary** | ** ** | **Total** | ** ** |
| Revenues                |       | $                                        | 154        |   | $ | 7,738 |   | $ | — |   | $ | 7,892 |   |
| Costs and expenses      |       | 9,395                                    |       | 7,824 |   | 789 |   | 18,008 |   |
| Operating loss          |       | $                                        | (9,241     | ) | $ | (86 | ) | $ | (789 | ) | $ | (10,116 | ) |
|                    |       |                                     |       |   |   |   |   |   |   |
| ** **              | ** ** | **Six  Months Ended June 30, 2008** | ** ** |
| ** **              | ** ** | **United  States**                       | ** ** | **France** | ** ** | **Hungary** | ** ** | **Total** | ** ** |
| Revenues                |       | $                                        | 25         |   | $ | 19,812 |   | $ | — |   | $ | 19,837 |   |
| Costs and expenses      |       | 14,679                                   |       | 7,739 |   | 649 |   | 23,067 |   |
| Operating income (loss) |       | $                                        | (14,654    | ) | $ | 12,073 |   | $ | (649 | ) | $ | (3,230 | ) |

 

 
| ** **             | ** ** | **Total  Assets (1)**     | ** ** |
|------------------------|------------|---------------------------|------------|
| ** **             | ** ** | **United  States**        | ** ** | **France** | ** ** | **Hungary** | ** ** | **Turkey** | ** ** | **Romania** | ** ** | ** ** | ** ** |
| ** **             | ** ** | **Continuing Operations** | ** ** | **Discontinued Operations** | ** ** | **Total** | ** ** |
| June 30, 2009     |       | $                         | 221,645    |   | $ | 90,978 |   | $ | (834 | ) | $ | (102,418 | ) | $ | — |   | $ | 209,371 |   |
| December 31, 2008 |       | $                         | 276,434    |   | $ | 93,691 |   | $ | 1,974 |   | $ | (69,537 | ) | $ | (33,046 | ) | $ | 269,516 |   |

 

----

| (1) | Each segment’s  total assets reflect the effect of intersegment eliminations of $62,360 for  the periods ending June 30, 2009 and December 31, 2008 |
|-----|--------------------------------------------------------------------------------------------------------------------------------------------------------------------|

 

**NOTE 8 —INCOME TAXES**

 

At June 30,2009, we recorded an income tax payable of $131,000 primarily due to incometaxes payable by our French subsidiary. For the six months ended June 30,2009 and 2008 we paid income taxes of approximately $4 million and $1.8million, respectively, related to French taxable income. As of June 30,2009, our French operations recorded a $747,000 tax benefit, and the U.S.operations recorded a tax benefit of $22,000, which resulted in a consolidatedtax benefit of $769,000. Our effective income tax rate differs from thestatutory rates applicable to jurisdictions in which we operate due primarilyto the establishment of a U.S. valuation allowance of $2.5 million, which wasrequired because we could not be assured of the future utilization of netoperating losses of $7.3 million.

 

Weadopted FIN No. 48, *“Accountingfor Uncertainty in Income Taxes”*, on January 1, 2007. As aresult of the adoption we recognized an increase in the liability forunrecognized tax expense of approximately $45,000, which was accounted for as adecrease to the January 1, 2007 balance of retained earnings. As of thedate of adoption and after the impact of recognizing the increase in liabilitynoted above, our unrecognized tax benefits totaled approximately $357,000, thedisallowance of which would not materially affect the effective income taxrate. There are no tax positions for which a material change in theunrecognized tax benefit is reasonably possible in the next 12 months.

 

TheCompany recognizes potential accrued interest and penalties related tounrecognized tax benefits within its global operations in income tax expense.In conjunction with the adoption of FIN 48, the Company recognizedapproximately $28,000 for the accrual of interest and penalties at January 1,2007, which was included as a component of the $357,000 unrecognized taxbenefit noted above. During the six months ended June 30, 2009, theCompany recognized $0 in potential interest and penalties associated withuncertain tax positions. To the extent interest and penalties are not assessedwith respect to uncertain tax positions, amounts accrued will be reduced andreflected as a reduction of the overall income tax provision.

 

Inaddition to U.S. federal tax returns, we file several state and foreign taxreturns, many of which remain open for examination for five years.

 

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**NOTE 9 —CAPITAL**

 

Forthe six months ended June 30, 2009, the Company issued 611,280 shares ofstock to employees and directors, all of which were immediately vested inaccordance with the terms of the grants and 25,000 stock options were exercisedunder the terms of the option agreements. Forfeitures for the six months ended June 30, 2009 were96,900 shares of restricted stock and 29,500 stock options.

 

**NOTE 10 —CAPITALIZED INTEREST**

 

Wecapitalize interest on major projects that require an extended period of timeto complete. Interest capitalized for the three months ended June 30, 2009and 2008 was $118,000 and $245,000 respectively.  Interest capitalized for the six months endedJune 30, 2009 and 2008 was $237,000 and $550,000, respectively.

 

**NOTE 11 —COMMITMENTS AND CONTINGENCIES**

 

In 2005, two separate incidents occurred offshore Turkey in the BlackSea, which resulted in the sinking of two caissons and the loss of threenatural gas wells. The Company has not been requested to or ordered by anygovernmental or regulatory body to remove the caissons. Therefore, the Companybelieves that the likelihood of receiving such a request or order is remote andno liability has been recorded.

 

The Company has also indemnified a third party vendor for any claimsmade related to these incidents. However, the Company believes the possibilityof a claim being asserted by such third-party is remote.

 

On October 16, 2003, the Company entered into an agreement (the “NetherbyAgreement”) with Netherby Investments Limited (“Netherby”) pursuant to whichNetherby agreed to post the collateral required by the Turkish government forthe Company to retain its rights to the eight off-shore exploration SASBlicenses in exchange for a 1.5% gross overriding royalty interest (the “OverridingRoyalty”) on the net value to Toreador of all future production on SASB, ifany.  On April 30, 2009, the Companyreceived a letter from attorneys representing Netherby claiming that Toreador’ssale of its 26.75% interest in the SASB to Petrol Ofisi in March 2009 andToreador’s proposed sale of its remaining 10% interest in the SASB constitute abreach of the Netherby Agreement and demanding a $10.4 million payment.  Toreador does not believe that Netherby isentitled to the $10.4 million claimed, though no formal legal evaluation of thelikely outcome of this claim can be made at this time.  The Company has agreed to indemnify PetrolOfisi against and in respect of any and all claims, liabilities, and lossesarising from the Overriding Royalty. Additionally, the Company believes the claim is baseless, without meritand will be vigorously defended against.

 

On June 17, 2009, The Scowcroft Group, Inc. (“Scowcroft”)filed a complaint in the United States District Court for the District ofColumbia against the Company. The complaint alleges that Toreador breached acontract (the “Scowcroft Contract”) between Scowcroft and Toreador relating tothe sale of its interests in the SASB and that Scowcroft is entitled to asuccess fee thereunder as a result of the sale of Toreador’s interests in theSASB to Petrol Ofisi in March 2009. The complaint also alleges unjust enrichment/quantum meruit andfraud.  Scowcroft is seeking damages inthe amount of $2 million plus interest, costs and expenses.  On July 24, 2009, the Company filed amotion to dismiss the complaint.  TheCompany believes that there are legal defects in the claims and intends todefend itself vigorously.

 

From time to time, we are named as a defendant in other legalproceedings arising in the normal course of business. In our opinion, the finaljudgment or settlement, if any, which may be awarded with any suit or claimwould not have a material adverse effect on our financial position.

 

**NOTE 12 —DISCONTINUED OPERATIONS**

 

In the fourthquarter of 2008 and during the first quarter of 2009, Toreador farmed out orsold all of its working interests in Romania to three different companies andclosed its office; thus, we no longer have any operational involvement inRomania.  All revenues and expensesassociated with the Romanian operation for the three months ended June 30,2009 and 2008 and for the six months ended June 30, 2009 and 2008 havebeen included in discontinued operations.

 

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In February 2009,the Board of Directors authorized management to retain Stellar Energy Advisors,based in London, UK, to manage a process to monetize its wholly ownedsubsidiary, Toreador Turkey Limited, including the Company’s remaining 10%interest in the SASB, in addition to the onshore production, and 2.2 millionnet acres in exploration licenses that are currently held in Turkey. Allrevenues and expenses associated with the Turkish operation for the threemonths ended June 30, 2009 and 2008 and for the six months ended June 30,2009 and 2008 have been included in discontinued operations.  Management cannot reasonably estimate thecosts to be incurred on the disposal of the Turkish assets.

 

The results of operations of assets in Romania and Turkey have beenpresented as discontinued operations in the accompanying consolidated statementof operations. Results for these assets reported as discontinued operationswere as follows:

 
| ** **                                                             | ** ** | **Three  Months********Ended********June 30,** | ** ** | **Six  Months********Ended********June 30,** | ** ** |
|------------------------------------------------------------------------|------------|-----------------------------------------------------|------------|---------------------------------------------------|------------|
| ** **                                                             | ** ** | **2009**                                            | ** ** | **2008**                                          | ** ** | **2009** | ** ** | **2008** | ** ** |
| Revenue:                                                               |       |                                                |       |                                              |       |   |   |   |   |
| Oil and natural gas sales                                              |       | $                                                   | 1,551      |                                              | $          | 8,877 |   | $ | 2,913 |   | $ | 14,008 |   |
| Operating costs and expenses:                                          |       |                                                |       |                                              |       |   |   |   |   |
| Lease operating expense                                                |       | 237                                                 |       | 2,259                                             |       | 503 |   | 3,835 |   |
| Exploration expense                                                    |       | 32                                                  |       | 510                                               |       | 230 |   | 811 |   |
| Depreciation, depletion and amortization                               |       | —                                              |       | 11,936                                            |       | — |   | 17,623 |   |
| Impairment of oil and natural gas properties                           |       | —                                              |       | 53,479                                            |       | 5,300 |   | 53,479 |   |
| General and administrative expense                                     |       | 732                                                 |       | 572                                               |       | 1,524 |   | 1,257 |   |
| Gain on sale of properties and other assets in  Romania                |       | —                                              |       | —                                            |       | (5,846 | ) | — |   |
| Total operating costs and expenses                                     |       | 1,001                                               |       | 68,756                                            |       | 1,711 |   | 77,005 |   |
| Operating income (loss)                                                |       | 550                                                 |       | (59,879                                           | )          | 1,202 |   | (62,997 | ) |
| Other income (expense)                                                 |       |                                                |       |                                              |       |   |   |   |   |
| Foreign currency exchange gain                                         |       | 3,752                                               |       | 134                                               |       | 3,319 |   | 322 |   |
| Interest and other income                                              |       | 196                                                 |       | 78                                                |       | 314 |   | 73 |   |
| Loss on early extinguishment of debt — revolving  credit facility |       | —                                              |       | —                                            |       | (4,881 | ) | — |   |
| Interest expense                                                       |       | 114                                                 |       | (1,115                                            | )          | (23 | ) | (2,235 | ) |
| Net income (loss) before income taxes                                  |       | 4,612                                               |       | (60,782                                           | )          | (69 | ) | (64,837 | ) |
| Income tax benefit                                                     |       | —                                              |       | (2,215                                            | )          | — |   | (2,891 | ) |
| Income (loss) from discontinued operations                             |       | $                                                   | 4,612      |                                              | $          | (58,567 | ) | $ | (69 | ) | $ | (61,946 | ) |

 

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The assets andliabilities of discontinued operations presented separately under the captions “Oiland natural gas properties, net, held for sale”, “Other assets held for sale”and “Liabilities held for sale” in balance sheets for the periods ended June 30,2009 and December 31, 2008 are valued at the lower of cost or fair valueless cost of selling. The table below shows the components of the other assetsheld for sale and liabilities held for sale.

 
| ** **                               | ** ** | **June 30,********2009** | ** ** | **December 31,********2008** | ** ** |
|------------------------------------------|------------|-------------------------------|------------|-----------------------------------|------------|
| ** **                               | ** ** | **(Unaudited)**               | ** ** | ** **                        | ** ** |
|                                     |       |                          |       |                              |       |
| Current assets:                          |       |                          |       |                              |       |
| Accounts receivable                      |       | $                             | 8,533      |                              | $          | 3,100 |   |
| Other                                    |       | 3,671                         |       | 1,567                             |       |
| Total current assets                     |       | 12,204                        |       | 4,667                             |       |
| Other assets                             |       | 529                           |       | 1,247                             |       |
| Other assets held for sale               |       | $                             | 12,733     |                              | $          | 5,914 |   |
|                                     |       |                          |       |                              |       |
| Current liabilities:                     |       |                          |       |                              |       |
| Accounts payable and accrued liabilities |       | $                             | 9,502      |                              | $          | 6,928 |   |
| Asset retirement obligations             |       | —                        |       | 703                               |       |
| Liabilities held for sale                |       | $                             | 9,502      |                              | $          | 7,631 |   |

 

**NOTE 13 —DERIVATIVES**

 

Weperiodically utilize derivative instruments such as futures and swaps forpurposes of hedging our exposure to fluctuations in the sales price of crudeoil and natural gas. We entered into futures and swap contracts for approximately16,000 Bbls per month for the months of January 2008 through September 2008.  This resulted in a net derivative fair valueloss of $3.7 million for the three months ended June 30, 2008 and $4.2million for the six months ended June 30, 2008. Presented in the tablebelow is a summary of the contracts entered in 2008:

 
| **Type** | ** ** | **Period**                                           | ** ** | **Barrels** | ** ** | **Floor** | ** ** | **Ceiling** | ** ** | **Loss** | ** ** |
|----------|------------|------------------------------------------------------|------------|-------------|------------|-----------|------------|-------------|------------|----------|------------|
| Collar   |       | January 1 —  March 31, 2008 |       | 48,000      |       | $         | 84.75      |        | $          | 92.75    |       | $ | 19 |   |
| Collar   |       | April 1 —  June 30, 2008         |       | 48,000      |       | $         | 92.25      |        | $          | 100.25   |       | 2,239 |   |
| Collar   |       | July 1 —  September 30, 2008     |       | 48,000      |       | $         | 91.75      |        | $          | 99.75    |       | 1,953 |   |
|     |       |                                                 |       |        |       |      |       |        |       | $        | 4,211      |   |

 

On June 16,2009, we entered into futures and swap contracts for approximately18,000 Bbls per month for the months of July 2009 through December 2009.Presented in the table below is a summary of the contracts entered into for thesix month period ended June 30, 2009:

 
| **Type** | ** ** | **Period**                                                    | ** ** | **Barrels** | ** ** | **Floor** | ** ** | **Ceiling** | ** ** | ** ** | ** ** |
|----------|------------|---------------------------------------------------------------|------------|-------------|------------|-----------|------------|-------------|------------|------------|------------|
|     |       |                                                          |       |        |       |      |       |        |       | ** ** | ** ** |
| Collar   |       | July 1,  2009 — September 30, 2009   |       | 55,200      |       | $         | 65.00      |        | $          | 77.00      |       | ** ** | ** ** |
| Collar   |       | October 1,  2009 — December 31, 2009 |       | 55,200      |       | $         | 65.00      |        | $          | 77.00      |       | ** ** | ** ** |

 

**NOTE 14 —FAIR VALUE MEASUREMENTS**

 

The carrying amounts of financial instruments including cash and cashequivalents, short-term investments, accounts receivable, accounts payable andaccrued liabilities approximate fair value, at June 30, 2009 and December 31,2008, due to the short-term nature or maturity of the instruments.

 

Long-term debt approximated fair value based on the quoted marketprices for the same or similar issues or on the current rates offered to theCompany for debt of the same maturities. 

 

On June 30, 2009, the convertible subordinate notes which had a bookvalue of $63.6 million, were trading at $752.00, which would equal a fairmarket value of approximately $47.8 million.

 

On December 31, 2008 the convertible subordinate notes which had a bookvalue of $80.28 million, were trading at $770.00, which would equal a fairmarket value of approximately $61.8 million.

 

SFAS No. 157 establishes a fair value hierarchy which prioritizesthe inputs to valuation techniques used to measure fair value into threelevels. The fair value hierarchy gives the highest priority to quoted marketprices (unadjusted) in active markets for identical assets or liabilities(Level 1) and the lowest priority to unobservable inputs (Level 3). Level2 inputs are inputs, other than quoted prices included within Level1, which are observable for the asset or liability, either directly orindirectly.

 

Certain assets and liabilities are reported at fair value on a nonrecurringbasis in our consolidated balance sheets.  The following methods andassumptions were used to estimate the fair values:

 

*Oil andGas Properties Held for Sale -*In February 2009, the Board of Directorsauthorized management to retain Stellar Energy Advisors, based in London, UK,to manage a process to monetize its wholly owned subsidiary, 

 

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Toreador Turkey Limited,including the Company’s remaining 10% interest in the SASB, in addition to theonshore production, and 2.2 million net acres in exploration licenses that arecurrently held in Turkey. These properties are valued at the lower of cost orfair value less selling expenses.

 

*Asset Impairments —* In accordance with SFAS No. 144,“Accounting for the Impairment or Disposal of Long-Lived Assets,” we review aproved oil and gas property for impairment when events and circumstancesindicate a possible decline in the recoverability of the carrying value of suchproperty. We estimate the undiscounted future cash flows expected in connectionwith the property and compare such undiscounted future cash flows to thecarrying amount of the property to determine if the carrying amount isrecoverable. If the carrying amount of the property exceeds its estimatedundiscounted future cash flows, the carrying amount of the property is reducedto its estimated fair value. Fair value may be estimated using comparablemarket data, a discounted cash flow method, or a combination of the two. In thediscounted cash flow method, estimated future cash flows are based onmanagement’s expectations for the future and include estimates of future oiland gas production, commodity prices based on commodity futures price strips asof the date of the estimate, operating and development costs, and arisk-adjusted discount rate.

 

*Goodwill*- We account for goodwill in accordance with Statementof Financial Accounting Standard No. 142,*”Goodwilland Other Intangible Assets”* (“Statement 142”). Under Statement 142,goodwill and indefinite-lived intangible assets are not amortized but arereviewed annually (or more frequently if impairment indicators arise) forimpairment.

 

*Asset Retirement Obligations —* We estimate the fair values of assetretirement obligations (AROs) based on discounted cash flow projections usingnumerous estimates, assumptions and judgments regarding such factors as theexistence of a legal obligation for an ARO; estimated probabilities, amountsand timing of settlements; the credit-adjusted risk-free rate to be used; andinflation rates. See Note 6 — Asset Retirement Obligations for a summary ofchanges in AROs.

 

Measurementinformation for assets that are measured at fair value on a nonrecurring basiswas as follows:

 
| ** **                              | ** ** | ** **                  | ** ** | **Fair Value Measurements Using**                  | ** ** | ** **                                            | ** ** |
|-----------------------------------------|------------|-----------------------------|------------|----------------------------------------------------|------------|-------------------------------------------------------|------------|
| **Description**                         | ** ** | **Fair Value  Measurement** | ** ** | **Quoted  Prices  in  Active  Markets  (Level 1)** | ** ** | **Significant  Other  Observable  Inputs  (Level 2)** | ** ** | **Significant  Unobservable  Inputs  (Level 3)** | ** ** | **Total  Impairment  Loss** | ** ** |
| ** **                              | ** ** | **(in millions)**           | ** ** |
| **Six Months Ended June 30, 2009** |       |                        |       |                                               |       |                                                  |       |   |   |   |   |
| Impaired oil and natural gas properties |       | $                           | 14,986     |                                               | —     |                                                  | —     |   | $ | 14,986 |   | $ | (5,300 | ) |
|                                         |            |                             |            |                                                    |            |                                                       |            |  |  |  |  |  |  |  |

 

**NOTE 15 —IMPAIRMENT OF ASSETS**

 

We evaluateproducing property costs for impairment and reduce such costs to fair value ifthe sum of expected undiscounted future cash flows is less than net book valuepursuant to Statement of Financial Accounting Standard No. 144, “Accountingfor the Impairment or Disposal of Long-Lived Assets” (“Statement 144”). Weassess impairment of non-producing leasehold costs and undeveloped mineral androyalty interests periodically on a field-by-field basis. We charge anyimpairment in value to expense in the period incurred. For the six months endedJune 30, 2009, we incurred an impairment charge of $5.3 million on ourTurkish natural gas producing properties.

 

The impairment charge in Turkey of $5.3 million is a result of adecline in the fair market value of the Company’s interest in South AkcakocaSub-Basin assets, which was recorded in the first quarter of 2009.  The fair market value decline was due to a25% reduction in the posted sales price of natural gas produced in Turkeyannounced on May 1, 2009.

 

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**NOTE 16 —RELOCATION OF HEADQUARTERS AND EMPLOYEE TERMINATIONS**

 

On February 23, 2009, the Company announced a plan to relocate itsheadquarters from Dallas, Texas to Paris, France since the Company’s operationsare located in Europe notwithstanding the fact that the Company is incorporatedin Delaware and listed on the NASDAQ Global Market.  As of June 30, 2009 the relocationprocess was complete.

 

On March 17, 2009, Toreador provided notice to 16 employees whoseemployment was terminated on such date or whose employment will be terminatedin connection with the expected relocation of our headquarters to Paris. As of June 30, 2009 the relocation and closing of the Dallas operationswas complete, with certain employees entitled to receive financial incentivesbecause the relocation was completed by June 30, 2009.  With regardto severance payments made, or to be made to employees, upon the receipt fromeach severed employee of an executed release of all present and future claims,Toreador has paid or will pay an aggregate of $158,000 in cash and issue anaggregate of 367,000 shares of Toreador common stock.  In addition, uponcertain milestones associated with the expected relocation being met, anadditional aggregate of $120,752 in stock was or will be distributed to certainemployees.  In accordance with SFAS No. 146,“*Accounting for Costs Associated with Exit orDisposal Activities*,” the costs associated with the involuntarytermination benefits were recognized during the three month period ended March 31,2009 with respect to those employees terminated prior to March 31, 2009and costs associated with certain employees required to remain with the Companylonger than 60 days are recognized over the minimum service period.

 

As of June 30, 2009 we had $3.4 million of costs associated withthe Dallas office/relocation of our headquarters to Paris, France. Inconnection with the relocation of our corporate headquarters to France,additional material charges may be incurred, the amount of which Toreadorcannot reasonably estimate at this time, but which will likely includecontinuing rental obligations for the Dallas office, subject to any reductionsdue to any subleases, and other relocation costs.

 

**NOTE 17 —SUBSEQUENT EVENTS**

 

The Companyevaluated its June 30, 2009 financial statements for subsequent eventsthrough the date the financial statements were issued which was August 7,2009.  The Company is not aware of anysubsequent events which would require recognition or disclosure in thefinancial statements.

 

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**ITEM 2 — *MANAGEMENT’SDISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND******RESULTS OF OPERATIONS***

 

Thefollowing discussion is intended to assist you in understanding our businessand results of operations together with our present financial condition. Thissection should be read in conjunction with our Consolidated FinancialStatements and the accompanying notes included elsewhere in this QuarterlyReport on Form 10-Q, as well as our Annual Report on Form 10-K forthe year ended December 31, 2008, which was initially filed with the SECon March 16, 2009 and amended on April 16, 2009.

 

**DISCLOSURESREGARDING FORWARD-LOOKING STATEMENTS**

 

Certainmatters discussed under “Management’s Discussion and Analysis of FinancialCondition and Results of Operations” and elsewhere in this report mayconstitute “forward-looking” statements within the meaning of the PrivateSecurities Litigation Reform Act of 1995, Section 27A of the SecuritiesAct and Section 21E of the Securities Exchange Act of 1934, as amended(the “Exchange Act”) and, as such, may involve known and unknown risks,uncertainties and other factors that may cause the actual results, performanceor achievements to be materially different from future results, performance orachievements expressed or implied by such forward-looking statements. When usedin this report, the words “anticipates,” “estimates,” “plans,” “believes,” “continues,”“expects,” “projections,” “forecasts,” “intends,” “may,” “might,” “will,” “would,”“could,” “should,” and similar expressions are intended to be among thestatements that identify forward-looking statements. The factors that mayaffect our expectations regarding our operations include, among others, thefollowing:

 

·                  our success in development, exploitation and exploration activities;

·                  our ability to make planned capital expenditures;

·                  declines in our production of natural gas and crude oil;

·                  prices for natural gas and crude oil;

·                  our ability to raise equity capital or incur additional indebtedness;

·                  economic and business conditions;

·                  political and economic conditions in oil producing countries;

·                  price and availability of alternative fuels;

·                  our acquisition and divestiture activities;

·                  results of our hedging activities; and

·                  other factors discussed elsewhere in this document.

 

Inaddition to these factors, important factors that could cause actual results todiffer materially from our expectations (“Cautionary Statements”) are disclosedunder “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31,2008, initially filed with the SEC on March 16, 2009 and amended on April 16,2009, which are incorporated by reference herein.

 

Allwritten and oral forward-looking statements attributable to us are expresslyqualified in their entirety by the Cautionary Statements.  We undertake no obligation to update orrevise publicly any forward-looking statements, whether as a result of newinformation, future events, or otherwise.

 

**EXECUTIVEOVERVIEW**

 

We arean independent international energy company engaged in oil and natural gasexploration, development, production and acquisition activities. Our strategyis to increase our oil and natural gas reserves through a balanced combinationof exploratory drilling, development and exploitation projects andacquisitions. We focus on exploration activities in countries where we canestablish large acreage positions. We also focus on prospects where we do nothave to compete directly with major integrated or large independent oil andnatural gas producers and where extensive geophysical and geological data isavailable. Our operations are located in European Union or European Unioncandidate countries that we believe have stable governments, havetransportation infrastructure, attractive fiscal policies and are net-importersof oil and natural gas.  Our financialresults depend upon many factors that significantly affect our results ofoperations including the following:

 

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·                  the sales price of natural gas and crude oil;

·                  the level of total sales volumes of crude oil and natural gas;

·                  the availability of, and our ability to raise additional capitalresources and provide liquidity to meet, cash flow needs;

·                  the level of and interest rates on borrowings; and

·                  the level and success of exploration and development activity.

 

During 2008, we saw oil prices rise to unprecedented levels and then inSeptember we saw the start of a deterioration in the credit and equitymarkets which continued to deteriorate further in beginning of 2009.  We also experienced a 50% - 60% decline inoil prices from the highest point received in 2008.  Oil prices are, and, we expect, will continueto be, extremely volatile for the remainder of the fiscal year 2009.  The results of our operations are highlydependent upon the prices received from our oil and natural gas production,which are dependent on numerous factors beyond our control.  Accordingly, significant changes to oil andnatural gas prices are likely to have a material impact on our financialcondition, results of operation, cash flows and revenue.  As discussed further below, these severe economicconditions have caused the Company to reevaluate its capital expenditureprogram for 2009 and how the Company will operate on a go forward basis.

 

In February 2009, we developed a corporate platform that was thebuilding block of our new corporate strategy that was presented at the AnnualShareholder Meeting in June 2009. The Board of Directors and managementare committed to restoring shareholder value, exercising financial discipline,transparency in all transactions, assessing strategic alternatives that layoutside and beyond the platform and strengthening the Company during thecurrent economic crisis, so that we may outperform our peers.

 

We believe that the following proactive steps will be the base for thefuture growth of the Company:

 

·                  The sale of a 26.75% interest in the SASB to Petrol Ofisi for aggregatecash consideration of $55 million, $50 million of which was funded on March 3,2009, with the remaining $5 million due on September 1, 2009;

 

·                  The Company has retained Stellar Energy Advisors, based in London, UK,to manage a process to monetize its wholly owned subsidiary, Toreador TurkeyLimited, including the Company’s remaining 10% interest in the SASB, inaddition to the onshore production, and 2.2 million net acres in explorationlicenses that the Company currently holds in Turkey. The Company is workingtowards completing and announcing a transaction by the end of the third quarterof this year; however, there can be assurance that such process will becompleted by then, if at all;

 

·                  A portion of the net proceeds of the sale of the 26.75% interest in theSASB to Petrol Ofisi have been used to fully repay and retire the creditfacilities with the International Finance Corporation;

 

·                  In April 2009, we repurchased $16.7 million principal amount ofthe Notes on the open market and through privately negotiated transactions for$12.7 million plus accrued interest and prepaid loan fees of $650,000.  This repurchase resulted in a gain of $3.4million on the early extinguishment of debt which was recorded in the secondquarter of 2009.

 

·                  A share buyback program was adopted by the Board of Directors in February 2009for the repurchase of up to 1 million shares of Toreador common stock that maybe repurchased in the open market at any time over the next 12 months.  As of June 30, 2009 no shares ofToreador common stock have been repurchased pursuant to the share buybackprogram;

 

·                  On February 23, 2009, the Company announced a plan to relocate itsheadquarters from Dallas, TX to Paris, France since the Company’s operationsare located in Europe notwithstanding the fact that the Company is incorporatedin Delaware and listed on the NASDAQ Global Market.  As of June 30, 2009, the Company hascompleted the relocation to Paris;

 

·                  The Company expects that the Paris Basin will remain the Company’s coreasset with current production of approximately 1,000 net barrels per day comingfrom low-decline, long-life assets. A comprehensive 

 

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portfolio review of our fields and 649,000 net acresheld pursuant to licenses is now underway and an additional 154,000 that arepending permitting. The results of the study will be used to launch thethree-year strategic plan that was announced at the Annual Stockholders Meetingin June 2009.

 

·                  On June 16, 2009 we entered into futures and swap contracts forapproximately 18,000 Bbls per month for the months of July 2009through December 2009 with a floor price of $65.00 per Bbl and a ceilingof $77.00 per Bbl.

 

·                  Toreador is considering opportunities to monetize its HungaryOperations and portfolio to enable the Company to expedite developement of theParis Basin Oil shale.

 

**FinancialSummary**

 

For the six monthsended June 30, 2009:

 

·                  We had revenues from continuing operations of $7.9 million.

 

·                  Operating costs from continuing operations were $18.0 million.

 

·                  Loss from discontinued operations, net of income taxes, was $69,000.

 

·                  Net loss available to common shares was $8.0 million.

 

·                  Production was 165 MBOE.

 

·                  Capital expenditures were $990,000.

 

At June 30,2009:

 

·                  Cash and restricted cash of $17.2 million.

 

·                  We had a current ratio of 3.08 to 1.

 

·                  We had a debt to equity ratio of 1.41 to1.

 

·                  Oil and natural gas properties held for sale of $15 million, whichreflects a $5.3 million impairment (discontinued operations shown on thestatement of operations), recorded at March 31, 2009, of our SASB field inoffshore Turkey due to the 25% reduction in the posted price of natural gasannounced on May 1, 2009. We believe that this amount represents the fairvalue, less selling cost, of our remaining 10% interest in the SASB, inaddition to our onshore production, and 2.2 million net acres in explorationlicenses that are currently held in Turkey.

 

**LIQUIDITYAND CAPITAL RESOURCES**

 

Thissection should be read in conjunction with Note 5 to Notes to ConsolidatedFinancial Statements included in this filing.

 

***Liquidity***

 

The Company’sliquidity depends on cash flow from operations, existing cash resources and thereceipt of proceeds from planned disposals of our remaining interests inTurkey.  As of June 30, 2009, we hadcash and restricted cash of $17.2 million, a current ratio of approximately3.08 to 1 and a debt to equity ratio of 1.41 to 1. For the six months ended June 30,2009, we had an operating loss of $10.1 million and capital expenditures were$990,000. The restricted cash relates to a letter of credit to secureadditional permits in Hungary.

 

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During2008, we saw oil prices rise to unprecedented levels and then in September wesaw the start of a deterioration in the credit and equity markets whichcontinued to deteriorate further during the beginning of 2009. We alsoexperienced a 50% - 60% decline in oil prices from the highest prices receivedin 2008. In order to reduce our vulnerability to crude oil price fluctuations,we have entered into a collar for approximately 18,000 Bbls per month forthe months of July 2009 through December 2009. This transaction setsthe floor at $65.00 per Bbl and the ceiling at $77.00 per Bbl.

 

As discussedfurther below, for the year ended December 31, 2008, we had a downwardreserves revision of 37.41%.  At December 31,2007 the price used for evaluating our oil reserves was $95.72 per barrel ascompared to the December 31, 2008 price of $34.29 per barrel.  This 64% decrease in oil price had a severe impacton the economic life of our wells, but also on the discounted present value at10% and the standardized measure or proved reserves.  As discussed further below, these severeeconomic conditions have caused the Company to reevaluate its capital expenditureprogram for 2009 and how the Company will operate on a go forward basis.

 

In June 2009,the Company announced its strategy for the next three years at the AnnualShareholder Meeting. The strategy is built on: (i) reduction in overhead —through relocating our corporate headquarters to Paris, France, significantsavings of general and administrative expense due to a consolidation of jobfunctions and the expected sale of all the Company’s remaining interest inTurkey; (ii) uses of cash — other than funding our capital program to meetminimum commitments associated with the Company’s licenses, we expect that ourprimary use of discretionary cash will be used to reduce debt; (iii) afocused oil and natural gas portfolio review — the Company will refocus itsefforts to those areas that offer the best chance of success and have a proveninfrastructure for the oil and natural gas industry. We believe that ourcurrent acreage position in France can serve as the platform for growth andoffer the Company the best opportunity to create stockholder value; and (iv) performancemanagement - the Board of Directors and management are committed to the bestpractices in corporate governance and will continually be reviewing and wherenecessary revising the procedures used to operate the Company. We intend to usethird party expertise to review and challenge our procedures and methodologies,both operationally and administratively. Also performance management, actionsfollowed by positive results, will become a driving principle in operating theCompany.

 

On March 3,2009, we closed the sale of a 26.75% interest in the SASB to Petrol Ofisi for$55 million. In accordance with the agreement, $50 million of the proceeds waspaid by Petrol Ofisi upon closing and the remaining $5 million is due on September 1,2009.  In February 2009, the Companyretained Stellar Energy Advisors, based in London, UK,  to manage a process to monetize itswholly-owned subsidiary, Toreador Turkey Limited, including the Company’s remaining10% interest in the SASB, in addition to the onshore production, and 2.2million net acres in exploration licenses that the Company currently holds inTurkey.  The Company is working towardscompleting and announcing a transaction by the end of the third quarter of thisyear; however, there can be no assurances that such a process will be completedby then, if at all.

 

Simultaneous withthe closing of the sale of the 26.75% interest in the SASB to Petrol Ofisi, werepaid the secured revolving credit facility with the International FinanceCorporation. The total amount of the payment was $36.4 million, which wascomprised of $30 million principal, $5.9 million additional compensation dueunder the credit facility as a result of our repayment (such additionalcompensation calculated under the terms of the credit facility as a percentageof the Company’s earnings before interest, tax, depreciation, amortization, andexploration expense) and $500,000 for accrued interest and fees.  As a result of the early extinguishment, werecorded a loss of $4.9 million for the six months ended June 30, 2009,which was recorded in discontinued operations.

 

Following theretirement of the credit facility with the International Finance Corporation,the Company does not have a credit facility and currently relies on its cashbalance to meet its immediate cash requirements.  Management will consider securing a newfacility in 2009, but given the current economic and financial market conditionsdue to the global credit market crisis, there can be no assurance that a newfacility can be obtained on acceptable terms or at all.

 

Our capitalexpenditure budget for 2009 is currently estimated at $6.7 million and assumesa sale of our remaining interest in Turkey to be closed by the end of the thirdquarter.  This amount represents our 10%share of Phase II development cost in the SASB, our estimated share of the costin the drilling of a Thrace Black Sea well after we are carried on the first$10.7 million of costs and the cost of installing a pipeline in Hungary inorder to produce the reserves associated with the Szolnok permit.

 

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As discussed in Note 11, on April 30, 2009, the Company received aletter from attorneys representing Netherby claiming that Toreador’s sale ofits 26.75% interest in the SASB to Petrol Ofisi in March 2009 and Toreador’sproposed sale of its remaining 10% interest in the SASB constitute a breach ofthe Netherby Agreement and demanding a $10.4 million payment.  Toreador does not believe that Netherby isentitled to the $10.4 million claimed, though no formal legal evaluation of thelikely outcome of this claim can be made at this time.  Additionally, the Company believes the claimis baseless, without merit and will be vigorously defended against.

 

On June 17, 2009, The Scowcroft Group, Inc. (“Scowcroft”)filed a complaint in the United States District Court for the District ofColumbia against the Company. The complaint alleges that Toreador breached acontract (the “Scowcroft Contract”) between Scowcroft and Toreador relating tothe sale of its interests in the SASB and that Scowcroft is entitled to asuccess fee thereunder as a result of the sale of Toreador’s interests in theSASB to Petrol Ofisi in March 2009. The complaint also alleges unjust enrichment/quantum meruit andfraud.  Scowcroft is seeking damages inthe amount of $2 million plus interest, costs and expenses.  On July 24, 2009, the Company filed amotion to dismiss the complaint.  TheCompany believes that there are legal defects in the claims and intends todefend itself vigorously.

 

Webelieve we will have sufficient cash flow from operations to meet all of our2009 obligations. However, if we do not complete the sale of our remaininginterest in Turkey, or we do not complete it on the terms or within thetimeframe we expect, the cash flow from our operations is less than anticipatedand if we have used up our cash we may also seek additional capital by: (i) forwardselling our crude oil and natural gas production; (ii) selling ourinterest in prospects and or licenses; (iii) selling our working interestin properties; or (iv) a combination of these actions in addition toissuing new debt or equity securities  Webelieve such actions will allow us to meet our capital commitments and that asa result, we will have sufficient liquidity for the remainder of 2009.

 

***Secured Revolving Facility***

 

On December 28,2006, we entered into a loan and guarantee agreement with International FinanceCorporation. The loan and guarantee agreement provided for a $25 millionfacility which was a secured revolving facility with a maximum facility amountof $25 million which maximum facility amount would have increased to $40million when the projected total borrowing base amount exceeds $50 million. The$25 million facility funded on March 2, 2007. The loan and guaranteeagreement also provided for an unsecured $10 million facility which funded on December 28,2006.  Both the $25 million facility andthe $10 million facility were used to fund our operations in Turkey and Romania.

 

On March 3,2009, we repaid and retired the facilities with the International FinanceCorporation. The total amount of the payment was $36.4 million, which wascomprised of $30 million principal, $5.9 million additional compensation dueunder the credit facility as a result of our repayment (such additionalcompensation calculated under the terms of the credit facility as a percentageof the Company’s earnings before interest, tax, depreciation, amortization andexploration expense) and $500,000 for accrued interest and fees.

 

***5% Convertible Senior Notes Due 2025***

 

On September 27,2005, we sold $75 million of Convertible Senior Notes due October 1,2025 to qualified institutional buyers pursuant to Rule 144A of theSecurities Act of 1933. We also granted the initial purchasers the option topurchase an additional $11.25 million aggregate principal amount ofConvertible Senior Notes to cover over-allotments. The option was exercised on September 30,2005. The total principal amount of Convertible Senior Notes issued was$86.25 million and total net proceeds were approximately$82.2 million.

 

TheConvertible Senior Notes bear interest at a rate of 5% per annum and can beconverted into common stock at an initial conversion rate of23.3596 shares of common stock per $1,000 principal amount of ConvertibleSenior Notes, subject to adjustment (equivalent to a conversion price ofapproximately $42.81 per share). We may redeem the Convertible Senior Notes, inwhole or in part, on or after October 6, 2008, and prior to October 1,2010, for cash at a redemption price equal to 100% of the principal amount ofConvertible Senior Notes to be redeemed, plus any accrued and unpaid interest,if the closing price of our common stock exceeds 130% of the conversion priceover a specified period. On or after October 1, 2010, we may redeem theConvertible Senior Notes, in whole or in part, at a redemption price equal to100% of the principal amount of Convertible Senior Notes to be redeemed, plusany 

 

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accrued and unpaidinterest, irrespective of the price of its common stock. Holders may converttheir Convertible Senior Notes at any time prior to the close of business onthe business day immediately preceding their stated maturity, and holders may,upon the occurrence of certain fundamental changes, and on October 1,2010, October 1, 2015, and October 1, 2020, require us to repurchase allor a portion of their Convertible Senior Notes for cash in an amount equal to100% of the principal amount of such Convertible Senior Notes, plus any accruedand unpaid interest.

 

In2008, we repurchased $6 million in principal amount of the Convertible SeniorNotes on the open market and through privately negotiated transactions for $5.3million plus accrued interest of $109,347. Additionally, we expensed $241,965of prepaid loan fees attributable to the repurchased Convertible Senior Notes.This resulted in a $458,535 gain on the early extinguishment of debt.

 

In April 2009,we repurchased $16.7 million in principal amount of the Convertible SeniorNotes on the open market for $12.7 million plus accrued interest and prepaidloan fees of $650,000. This repurchase resulted in a gain of $3.4 million onthe early extinguishment of debt which was recorded in the second quarter of2009.  We intend to continue to buy backa portion of the currently outstanding Convertible Senior Notes on the openmarket or in privately negotiated transactions, subject to market conditions,applicable legal requirements and other factors.

 

***Dividend and Interest Requirements***

 

Dividendson our common stock may be declared and paid out of funds legally availablewhen and as determined by our Board of Directors. Our policy is to hold andinvest corporate funds on a conservative basis, and, thus, we do not anticipatepaying cash dividends on our common stock in the foreseeable future.

 

***Contractual Obligations***

 

Thefollowing table sets forth our contractual obligations in thousands at June 30,2009 for the periods shown:

 
| ** **                    | ** ** | **Total** | ** ** | **Less  Than********One Year** | ** ** | **One  to********Three Years** | ** ** | **Four  to********Five Years** | ** ** | **More  Than********Five Years** | ** ** |
|-------------------------------|------------|-----------|------------|--------------------------------|------------|--------------------------------|------------|--------------------------------|------------|----------------------------------|------------|
| Long-term debt                |       | $         | 63,592     |                           | $          | —                         |       | $                              | 63,592     |                             | $          | — |   | $ | — |   |
| Lease commitments             |       | 3,169     |       | 601                            |       | 1,156                          |       | 1,244                          |       | 168                              |       |
| Total contractual obligations |       | $         | 66,761     |                           | $          | 601                            |       | $                              | 64,748     |                             | $          | 1,244 |   | $ | 168 |   |

 

Contractualobligations for long-term debt above does not include amounts for interestpayments.

 

**CRITICALACCOUNTING POLICIES**

 

Thediscussion and analysis of our financial condition and results of operations isbased upon the consolidated financial statements, which have been prepared inaccordance with accounting principles generally accepted in the United States.The preparation of these financial statements requires us to make estimates andjudgments that affect the reported amounts of assets, liabilities, revenues andexpenses. Our significant accounting policies are described in Note 2 toour consolidated financial statements included in Form 10-K for the yearended December 31, 2008. We have identified below policies that are ofparticular importance to the portrayal of our financial position and results ofoperations and which require the application of significant judgment bymanagement. We analyze our estimates on a periodic basis and base our estimateson experience and various other assumptions that we believe to be reasonableunder the circumstances. Actual results may differ from these estimates usingdifferent assumptions or conditions. We believe the following criticalaccounting policies affect our more significant judgments and estimates used inthe preparation of our financial statements:

 

***Successful Efforts Method of Accounting***

 

Weaccount for our oil and natural gas exploration and development activitiesutilizing the successful efforts method of accounting. Under this method, costsof productive exploratory wells, development dry holes and productive wells andundeveloped leases are capitalized. Oil and natural gas lease acquisition costsare also capitalized. Exploration costs, including personnel costs, certaingeological and geophysical expenses and delay rentals for oil and natural gasleases, are charged to expense as incurred. Exploratory drilling costs areinitially 

 

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capitalized, butsuch costs are charged to expense if and when the well is determined not tohave found reserves in commercial quantities. In most cases, a gain or loss isrecognized for sales of producing properties.

 

Theapplication of the successful efforts method of accounting requires management’sjudgment to determine the proper designation of wells as either developmentalor exploratory, which will ultimately determine the proper accounting treatmentof the costs incurred. The results from a drilling operation can takeconsiderable time to analyze, and the determination that commercial reserveshave been discovered requires both judgment and application of industryexperience. Wells may be completed that are assumed to be productive andactually deliver oil and natural gas in quantities insufficient to be economic,which may result in the abandonment of the wells at a later date. On occasion,wells are drilled which have targeted geologic structures that are bothdevelopmental and exploratory in nature, and in such instances an allocation ofcosts is required to properly account for the results. Delineation seismiccosts incurred to select development locations within a productive oil andnatural gas field are typically treated as development costs and capitalized,but often these seismic programs extend beyond the proved reserve areas andtherefore management must estimate the portion of seismic costs to expense asexploratory. The evaluation of oil and natural gas leasehold acquisition costsrequires management’s judgment to estimate the fair value of exploratory costsrelated to drilling activity in a given area. Drilling activities in an area byother companies may also effectively condemn leasehold positions.

 

Thesuccessful efforts method of accounting can have a significant impact on theoperational results reported when we enter a new exploratory area in hopes offinding oil and natural gas reserves. The initial exploratory wells may beunsuccessful and the associated costs will be expensed as dry hole costs.Seismic costs can be substantial which will result in additional explorationexpenses when incurred.

 

***Reserves Estimate***

 

Proved reservesare estimated quantities of crude oil, natural gas and natural gas liquids thatgeological and engineering data demonstrate with reasonable certainty to berecoverable in future years from known reservoirs under existing economic andoperating conditions. Proved developed reserves are reserves that can beexpected to be recovered through existing wells with existing equipment andoperating methods as well as oil and natural gas expected to be obtainedthrough the application of fluid injection or other improved recoverytechniques for supplementing the natural forces and mechanisms of primaryrecovery after testing by a pilot project or after the operation of aninstalled program has been confirmed through production response that increasedrecovery will be achieved. Proved undeveloped reserves are reserves that areexpected to be recovered from new wells on undrilled acreage or from existingwells where a relatively major expenditure is required for recompletion. Provedundeveloped reserves on undrilled acreage are limited: (i) to thosedrilling units offsetting productive units that are reasonably certain ofproduction when drilled and (ii) to other undrilled units where it can bedemonstrated with certainty that there is continuity of production from theexisting productive formation. We emphasize that the volume of reserves areestimates that, by their nature are subject to revision. The estimates are madeusing geological and reservoir data, as well as production performance data. Theseestimates are reviewed annually and revised, either upward or downward, aswarranted by additional performance data. These reserve revisions resultprimarily from improved or a decline in performance from a variety of sourcessuch as an addition to or a reduction in recoveries below or above previouslyestablished lowest known hydrocarbon levels, improved or a decline in drainagefrom natural drive mechanisms, and the realization of improved or declineddrainage areas. If the estimates of proved reserves were to decline, the rateat which we record depletion expense would increase.

 

For the year ended December 31, 2008, we had a downward reserverevision of 37.41%. At December 31, 2007 the price used for evaluating ouroil reserves was $95.72 per barrel as compared to the December 31, 2008price of $34.72 per barrel. This 64% decrease in oil price had a severe impacton the economic life of our wells, but also on the discounted present value at10% and the standardized measure of proved reserves. This downward revision,which primarily affected our French oil reserves, was due to the followingfactors: (i) decrease in economic life due to change in economics caused anet decrease of 1,682 MBbl; (ii) removing 12 proved undeveloped locationsfrom the report caused a net decrease 1,889 MBbl; (iii) negative reserverevisions resulted in a decrease in reserves of 405 MBbl; (iv) 14 wellswere shut-in resulting in a decrease of 401 MBbl; (v) three drilledlocations in prior years resulted in one producing well which wasnon-commercial at December 31, 2008 causing a net decrease of 280 MBbl;(vi) onewell was lost during workover operations causing a net decrease  37 MBbl; (vii) 2008 production of 805MBOE.  In Hungary, we were able to securea gas contract and were able to restore the reserves lost in 2007; 

 

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this resulted inan increase of 159 MBOE and in Romania due to the poor performance of the fieldresulted in a decrease of 54 MBOE. In Turkey, we had downward revisions of 390MBOE, which was due to a decrease in the economic life of the proved developedwells.

 

***Impairment of Oil and Natural GasProperties***

 

Wereview our proved oil and natural gas properties for impairment on an annualbasis or whenever events and circumstances indicate a potential decline in therecoverability of their carrying value. We estimate the expected future cashflows from our proved oil and natural gas properties and compare these futurecash flows to the carrying value of the oil and natural gas properties todetermine if the carrying value is recoverable. If the carrying value exceedsthe estimated undiscounted future cash flows, we will adjust the carrying valueof the oil and natural gas properties to its fair value in the current period.The factors used to determine fair value include, but are not limited to,estimates of reserves, future commodity prices, future production estimates, anticipatedcapital expenditures, and a discount rate commensurate with the risk associatedwith realizing the expected cash flows projected. Unproved properties arereviewed quarterly to determine if there has been impairment of the carryingvalue, with any such impairment charged to expense in the period. Given thecomplexities associated with oil and natural gas reserves estimate and thehistory of price volatility in the oil and natural gas markets, events mayarise that will require us to record an impairment of our oil and natural gasproperties and there can be no assurance that such impairments will not berequired in the future nor that they will not be material.

 

On May 1,2009, the Prime Minister of Turkey, announced a 25% reduction in the postedprice of natural gas in Turkey which caused us to reevaluate the fair value ofour SASB and for management to estimate that the fair value of the asset hasbeen impaired by approximately $5.3 million at March 31, 2009;accordingly, recorded an impairment to reflect this change in fair value.

 

***Future Development and Abandonment Costs***

 

Futuredevelopment costs include costs to be incurred to obtain access to provedreserves, including drilling costs and the installation of productionequipment. Future abandonment costs include costs to dismantle and relocate ordispose of our production equipment, gathering systems, wells and relatedstructures and restoration costs of land. We develop estimates of these costsfor each of our properties based upon the type of production structure, depthof water, reservoir characteristics, depth of the reservoir, market demand forequipment, currently available procedures and consultations with constructionand engineering consultants. Because these costs typically extend many yearsinto the future, estimating these future costs is difficult and requiresmanagement to make estimates and judgments that are subject to future revisionsbased upon numerous factors, including changing technology, the ultimatesettlement amount, inflation factors, credit adjusted discount rates, timing ofsettlement and changes in the political, legal, environmental and regulatoryenvironment. We review our assumptions and estimates of future abandonmentcosts on an annual basis. SFAS No. 143 *“Accountingfor Asset Retirement Obligations”*requires that the fair value of aliability for an asset retirement obligation be recorded in the period in whichit is incurred and the corresponding cost capitalized by increasing thecarrying amount of the related long-lived asset. The liability is accreted toits present value each period, and the capitalized cost is depreciated over theuseful life of the related asset. If the liability is settled for an amountother than the recorded amount, a gain or loss is recognized.

 

Holdingall other factors constant, if our estimate of future abandonment costs isrevised upward, earnings would decrease due to higher depreciation, depletionand amortization expense. Likewise, if these estimates were revised downward,earnings would increase due to lower depreciation, depletion and amortizationexpense.

 

***Income Taxes***

 

Forfinancial reporting purposes, we generally provide taxes at the rate applicablefor the appropriate tax jurisdiction. Because our present intention is toreinvest the unremitted earnings in our foreign operations, excludingdiscontinued operations, we do not provide U.S. income taxes on unremittedearnings of foreign subsidiaries. Management periodically assesses the need toutilize these unremitted earnings to finance our foreign operations. Thisassessment is based on cash flow projections that are the result of estimatesof future production, commodity prices and expenditures by tax jurisdiction forour operations. Such estimates are inherently imprecise since many assumptionsutilized in the cash flow projections are subject to revision in the future.

 

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Managementalso periodically assesses, by tax jurisdiction, the probability of recovery ofrecorded deferred tax assets based on its assessment of future earningsestimates. Such estimates are inherently imprecise since many assumptionsutilized in the assessments are subject to revision in the future.

*** ***

***Derivatives***

 

Weperiodically utilize derivative instruments such as futures and swaps forpurposes of hedging our exposure to fluctuations in the price of crude oil. Inaccordance with SFAS No. 133, “*Accounting for**Derivative Instruments**and Hedging Activities”,*we have electednot to designate the derivative financial instruments to which we are a partyas hedges, and accordingly, we record such contracts at fair value andrecognize changes in such fair value in current earnings as they occur. Wedetermine the fair value of futures and swap contracts based on the differencebetween their fixed contract price and the underlying market price at thedetermination date. The realized and unrealized gains and losses on derivativesare recorded as a derivative fair value gain or loss in the income statement.

 

***Foreign Currency Translation***

 

Thefunctional currency for Turkey and Hungary is the U.S. Dollar and inFrance the functional currency is the Euro. Translation gains or losses resultingfrom transactions in the New Turkish Lira in Turkey and the Forint in Hungaryare included in income available to common shares for the current period.Translation gains and losses resulting from transactions in Euros are includedin other comprehensive income for the current period. We periodically reviewthe operations of our entities to ensure the functional currency of each entityis the currency of the primary economic environment in which we operate.

 

**RESULTS OF OPERATIONS**

 

***COMPARISON OF THE THREE MONTHS ENDED JUNE30, 2009 AND 2008***

 

Thefollowing tables present production and average unit prices for the geographicsegments indicated:

 
| ** **      | ** ** | **For  the Three********Months Ended********June 30,** | ** ** |
|-----------------|------------|-------------------------------------------------------------|------------|
| ** **      | ** ** | **2009**                                                    | ** ** | **2008** | ** ** |
| **Production:** | ** ** | ** **                                                  | ** ** | ** ** | ** ** |
| Oil (MBbls):    |       |                                                        |       |   |   |
| France          |       | 81                                                          |       | 94 |   |

 
| ** **         | ** ** | **For  the Three********Months Ended********June 30,** | ** **  |
|--------------------|------------|-------------------------------------------------------------|-------------|
| ** **         | ** ** | **2009**                                                    | ** **  | **2008** | ** ** |
| **Average Price:** | ** ** | ** **                                                  | ** **  | ** ** | ** ** |
| Oil $(/Bbl):       |       |                                                        |        |   |   |
| France             |       | $                                                           |  54.74 |   | $ |  116.78 |   |
|                    |            |                                                             |             |  |  |  |  |

 

***Revenue***

 

*Oil and natural gas sales*

 

Oiland natural gas sales for the three months ended June 30, 2009 were $4.5million, as compared to $11 million for the three months ended June 30,2008.  This decrease is primarily due tothe global decrease in oil prices during the three months ended June 30,2009, as compared to the comparable period of 2008. This price decreaseresulted in a decrease of revenue of $5 million. Additionally, we had adecrease in oil production of 13 MBbls as a result of wells being shut in forworkovers and natural decline, resulting in a decrease in revenue of $1.5million.

 

Theabove table compares both volumes and prices received for oil for the threemonths ended June 30, 2009 and 2008. Oil prices are, and, we expect, willcontinue to be, extremely volatile for the remainder of the fiscal year2009.  The results of our operations arehighly dependent upon the prices received from our oil and natural gasproduction, which are dependent on numerous factors beyond our control.  Accordingly, significant changes to oil andnatural gas prices are likely to have a material impact on our financialcondition, results of operation, cash flows and revenue.

 

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***Costs and expenses***

 

*Lease operating*

 

Leaseoperating expense was $1.8 million, or $22.22 per BOE produced for thethree months ended June 30, 2009, as compared to $2.6 million, or$27.84 per BOE produced, for the three months ended June 30, 2008.  This decrease is primarily due to thestrengthening of the U.S. Dollar in the second quarter of 2009 compared to the second quarter of 2008 and areduction in the cost of services provided by third-party vendors due tocurrent economic conditions.

 

*Exploration expense*

 

Explorationexpense for the three months ended June 30, 2009 was $146,000, as comparedto $469,000 for the three months ended June 30, 2008. This decrease is dueprimarily to the reduction in exploration staff in the Dallas office due to therelocation of our headquarters to Paris.

 

*Depreciation, depletion and amortization*

 

Depreciation,depletion and amortization expense for the three months ended June 30,2009 was $1.6 million or $19.65 per BOE produced, as compared to$1.2 million, or $12.24 per BOE produced for the three months ended June 30,2008. This increase is primarily due to the lower proved reserves assigned toour French assets at December 31, 2008 due to depressed oil prices and waspartially offset by the decline in oil production of 13MBbls in the secondquarter of 2009 as compared to the second quarter of 2008.

 

*Impairmentof oil and gas properties*

 

At June 30,2008, we recorded an impairment to oil and gas properties totaling $53.5million. We review our proved and unproved oil and natural gas properties forimpairment on an annual basis or whenever events and circumstances indicate apotential decline in the recoverability of their carrying value. As explainedbelow, our review at June 30, 2008, indicated a potential decline in therecoverability of our South Akcakoca Sub-Basin and Trinidad assets.

 

The impairmentcharge in Turkey was a result of us entering into a Letter of Intent to sell a26.75% interest in the South Akcakoca Sub-Basin properties for $80.3 million.This sale price indicates that the fair value of our 36.75% working interestwas $110.3 million. The net book value of the South Akcakoca Sub-Basin asset atJune 30, 2008 was $155.0 million, resulting in an impairment of $53.5million.

 

The impairmentcharge of $2 million for the undeveloped leasehold costs in Trinidad, was dueto management’s decision to exit Trinidad and discontinue our association withour registered agent in the country.

 

There were noimpairment charges for the three months ended June 30, 2009.

 

*General and administrative beforestock compensation, cost incurred due to resignation of former officers andcosts associated with the Dallas office/relocation of headquarters*

 

Generaland administrative expense, not including stock compensation expense, cost incurred due to the resignation offormer officers and the costs associated with the relocation of thecorporate headquarters from Dallas, Texas to Paris, France, was$2.2 million for the three months ended June 30, 2009 compared with$3 million for the three months ended June 30, 2008. This decrease isprimarily due to the reduction in staff of the Dallas office in 2009, due tothe relocation of our corporate headquarters to Paris, France.

 

*Stock compensation expense*

 

Stockcompensation expense was $1.9 million for the three months ended June 30,2009 compared with $802,000 for the three months ended June 30, 2008. Thisincrease is due to the change in the structure of Board compensation, effectivebeginning in 2009, whereby directors receive a greater portion of theircompensation in stock rather than cash and a stock bonus that was granted toforeign office employees.  The immediatevesting of grants made to 

 

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employees in theDallas office that have been terminated has been classified as “Cost associatedwith the Dallas office/relocation of corporate headquarters from Dallas, Texasto Paris, France.”

 

*Costincurred related to the resignation of former officers of the Company*

 

Therewere no costs incurred related to the resignation of officers for the threemonths ended June 30, 2009.

 

In June 2008,Michael FitzGerald resigned as Executive Vice President - Exploration andProduction and Edward Ramirez resigned as Senior Vice President - Explorationand Production. Their respective Separation and Release Agreements provided for(i) each to receive one year of salary which together resulted in anexpense of $600,000, and (ii) Mr. FitzGerald the immediate vesting of5,000 shares of restricted stock grants and for Mr. Ramirez the immediatevesting of 7,000 shares of restricted stock grants which together resulted inan expense of $35,000.

 

Inaddition in June 2008, three other employees resigned, which collectivelyresulted in an additional $304,000 of expense

 

*Cost associated with the Dallas office/ relocation ofcorporate headquarters from Dallas, Texas to Paris, France*

 

Forthe three months ended June 30, 2009 we had $1.6 million of costsassociated with the Dallas office/ relocation of our headquarters to Paris,France. The major components are: 1) salaries and wages associated with Dallasoffice employees $351,000; 2) severance payments $759,000; 3) corporaterestructuring expenses $332,000; 4) travel associated with Dallas officeemployees $159,000 and 5) Dallas office rent $27,000.

 

Forthe three months ended June 30, 2008, we did not have any such relocationcosts.

 

*Gain on the sale of properties and other assets*

 

Forthe three months ended June 30, 2009 we recorded a gain on the sale ofproperties of $121,000. The gain is a result of the sale of a royalty interestin producing properties located in Canada. These properties had a zero costbasis and were acquired  in connectionwith the acquisition of Madison Oil in 2003. For the three months ended June 30,2008 we did not have any property or other asset sales.

 

*Loss on oil and gas derivative contracts*

 

Losson oil and gas derivative contracts for the three months ended June 30,2009 was zero, as compared to a loss of $3.7 million for the three months endedJune 30, 2008. The loss in 2008 represents the recognized loss on thecommodity derivative contracts with Total Oil Trading. Presented in the tablebelow is a summary of the contracts entered into:

 
| **Type** | ** ** | **Period**                                       | ** ** | **Barrels** | ** ** | **Floor** | ** ** | **Ceiling** | ** ** | **Loss** | ** ** |
|----------|------------|--------------------------------------------------|------------|-------------|------------|-----------|------------|-------------|------------|----------|------------|
| Collar   |       | April 1 —  June 30, 2008     |       | 48,000      |       | $         | 92.25      |        | $          | 100.25   |       | $ | 1,994 |   |
| Collar   |       | July 1 —  September 30, 2008 |       | 48,000      |       | $         | 91.75      |        | $          | 99.75    |       | 1,677 |   |
|     |       |                                             |       |        |       |      |       |        |       | $        | 3,671      |   |

 

*Foreign currency exchange gain (loss)*

 

Werecorded a loss on foreign currency exchange of $653,000 for the three monthsended June 30, 2009 compared with a gain of $7,000 for the three monthsended June 30, 2008. This decrease is primarily due to the weakening ofthe Hungarian Forint, which was partially offset by the stabilization of theEuro in the second quarter of 2009 as compared to the second quarter of 2008.

 

*Gain on the early extinguishment of Convertible Notes*

 

In April 2009, we repurchased $16.7 million principal amount ofthe Notes on the open market and through privately negotiated transactions for$12.7 million plus accrued interest and prepaid loan fees of $650,000.  This repurchase resulted in a gain of $3.4million on the early extinguishment of debt which was recorded in the second 

 

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quarter of2009.  We intend to continue to buy backa portion of the currently outstanding Notes in the open market or in privatelynegotiated transactions, subject to market conditions, applicable legalrequirements and other factors.

 

*Interest and other income*

 

Interestand other income was $325,000 for the three months ended June 30, 2009 ascompared to interest and other income of $178,000 for the three months ended June 30,2008. For the three months ended June 30, 2009, our average cash balancewas larger than our average cash balance for the three months ended June 30,2008.

 

*Interest expense, net of interest capitalized*

 

Interestexpense was $ 871,000 for the three months ended June 30, 2009, ascompared to $895,000 for the three months ended June 30, 2008. Thisdecrease is due to the retirement of $22.7 million in face value of the 5%Convertible Senior Notes since June 30, 2008.

 

*Discontinued operations*

 

In the fourthquarter of 2008 and during the first quarter of 2009, Toreador farmed out orsold all of its working interests in Romania to three different companies andclosed its office; thus, we no longer have any operational involvement inRomania.  All revenues and expensesassociated with the Romanian operation for the three months ended June 30,2009 and 2008 have been included in discontinued operations.

 

In February 2009,the Board of Directors authorized management to retain Stellar Energy Advisors,based in London, UK, to manage a process to monetize its wholly-ownedsubsidiary, Toreador Turkey Limited, including the Company’s remaining assetsin Turkey including the 10% interest in the SASB, in addition to the onshoreproduction, and 2.2 million net acres in exploration licenses that the Companycurrently holds in Turkey. All revenues and expenses associated with theTurkish operation for the three months ended March 31, 2009 and 2008 havebeen included in discontinued operations.

 

The results of operations of assets in Romania and Turkey have beenpresented as discontinued operations in the accompanying consolidatedstatements of operations. Results for these assets reported as discontinuedoperations were as follows:

 
| ** **                                              | ** ** | **Three  Months Ended********June 30,** | ** ** |
|---------------------------------------------------------|------------|----------------------------------------------|------------|
| ** **                                              | ** ** | **2009**                                     | ** ** | **2008** | ** ** |
| Revenue:                                                |       |                                         |       |   |   |
| Oil and natural gas sales                               |       | $                                            | 1,551      |   | $ | 8,877 |   |
| Operating costs and expenses:                           |       |                                         |       |   |   |
| Lease operating expense                                 |       | 237                                          |       | 2,259 |   |
| Exploration expense                                     |       | 32                                           |       | 510 |   |
| Depreciation, depletion and amortization                |       | —                                       |       | 11,936 |   |
| Impairment of oil and natural gas properties            |       | —                                       |       | 53,479 |   |
| General and administrative expense                      |       | 732                                          |       | 572 |   |
| Gain on sale of properties and other assets in  Romania |       | —                                       |       | — |   |
| Total operating costs and expenses                      |       | 1,001                                        |       | 68,756 |   |
| Operating income (loss)                                 |       | 550                                          |       | (59,879 | ) |
| Other income (expense)                                  |       |                                         |       |   |   |
| Foreign currency exchange gain (loss)                   |       | 3,752                                        |       | 134 |   |
| Interest and other income                               |       | 196                                          |       | 78 |   |
| Interest expense                                        |       | 114                                          |       | (1,115 | ) |
| Net income (loss) before income taxes                   |       | 4,612                                        |       | (60,782 | ) |
| Income tax benefit                                      |       | —                                       |       | 2,215 |   |
| Income (loss) from discontinued operations              |       | $                                            | 4,612      |   | $ | (58,567 | ) |

 

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Thefollowing tables present production and average unit prices for Turkey:

*** ***
| ** **      | ** ** | **For  the Three********Months Ended********June 30,** | ** ** |
|-----------------|------------|-------------------------------------------------------------|------------|
| ** **      | ** ** | **2009**                                                    | ** ** | **2008** | ** ** |
| **Production:** | ** ** | ** **                                                  | ** ** | ** ** | ** ** |
| Oil (MBbls):    |       |                                                        |       |   |   |
| Turkey          |       | 13                                                          |       | 14 |   |
| Gas (MMcf):     |       |                                                        |       |   |   |
| Turkey          |       | 107                                                         |       | 656 |   |
| MBOE:           |       |                                                        |       |   |   |
| Turkey          |       | 31                                                          |       | 123 |   |

 
| ** **         | ** ** | **For  the Three********Months Ended********June 30,** | ** ** |
|--------------------|------------|-------------------------------------------------------------|------------|
| ** **         | ** ** | **2009**                                                    | ** ** | **2008** | ** ** |
| **Average Price:** | ** ** | ** **                                                  | ** ** | ** ** | ** ** |
| Oil ($/Bbl):       |       |                                                        |       |   |   |
| Turkey             |       | 50.73                                                       |       | 114.81 |   |
| Gas ($/Mcf):       |       |                                                        |       |   |   |
| Turkey             |       | 8.28                                                        |       | 9.96 |   |
| $/BOE:             |       |                                                        |       |   |   |
| Turkey             |       | 50.11                                                       |       | 66.04 |   |

 

Oiland natural gas sales from discontinued operations for the three months ended June 30,2009 were $1.6 million, as compared to $8.9 million for the comparableperiod in 2008. This decrease is primarily due to the sale of our  26.75% interest to Petrol Ofisi and the$15.93 per BOE decline in oil and natural gas prices.

 

***Other comprehensive income***

 

Themost significant element of comprehensive income, other than net income, isforeign currency translation. For the three months ended June 30, 2009, wehad accumulated an unrealized income of $3.8 million as compared to anunrealized loss of $208,000 for the comparable period in 2008.  This change is primarily due to thestrengthening of the U.S. Dollar compared to the Euro for the three monthsended June 30, 2009 versus June 30, 2008.

 

**RESULTS OF OPERATIONS**

 

***COMPARISON OF THE SIX MONTHS ENDED JUNE 30,2009 AND 2008***

 

Thefollowing tables present production and average unit prices for the geographicsegments indicated:

 
| ** **      | ** ** | **For  the Six********Months Ended********June 30,** | ** ** |
|-----------------|------------|-----------------------------------------------------------|------------|
| ** **      | ** ** | **2009**                                                  | ** ** | **2008** | ** ** |
| **Production:** | ** ** | ** **                                                | ** ** | ** ** | ** ** |
| Oil (MBbls):    |       |                                                      |       |   |   |
| France          |       | 165                                                       |       | 189 |   |

 
| ** **          | ** ** | **For  the Six********Months Ended********June 30,** | ** **        |
|---------------------|------------|-----------------------------------------------------------|-------------------|
| ** **          | ** ** | **2009**                                                  | ** **        | **2008** | ** ** |
| **Average  Price:** | ** ** | ** **                                                | ** **        | ** ** | ** ** |
| Oil ($/Bbl):        |       |                                                      |              |   |   |
| France              |       | $                                                         |   46.80 |   | $ |   104.78 |   |
|                     |            |                                                           |                   |  |  |  |  |

 

***Revenue***

 

*Oil and natural gas sales*

 

Oiland natural gas sales for the six months ended June 30, 2009 were $7.9million, as compared to $19.8 million for the six months ended June 30,2008.  This decrease is primarily due tothe global decrease in oil prices during the six months ended June 30,2009, as compared to the comparable period of 2008. This resulted in areduction of revenue of $9.6 million. Additionally, we had a decrease inoil production of 24 MBbls as a result of wells being shut in for workovers andnatural decline, resulting in a decrease in revenue of $2.3 million.

 

The above tablecompares both volumes and prices received for oil for the six months ended June 30,2009 and 2008. Oil prices are, and, we expect, will continue to be, extremelyvolatile for the remainder of the fiscal year 2009.  The results of our operations are highlydependent upon the prices received from our oil and natural gas production,which are dependent on numerous factors beyond our control.  Accordingly, significant changes to oil andnatural gas prices are likely to have a material impact on our financialcondition, results of operation, cash flows and revenue.

 

***Costs and expenses***

 

*Lease operating*

 

Leaseoperating expense was $3.6 million, or $21.81 per BOE produced, for thesix months ended June 30, 2009, 

 

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as compared to$4.5 million, or $23.81 per BOE produced for the six months ended June 30,2008.  This decrease is primarily due tothe strengthening of the U.S. Dollar in the six months ended June 30, 2009compared to the six months ended June 30, 2008 and a reduction in the costof services provided by third-party vendors due to current economic conditions.

 

*Exploration expense*

 

Explorationexpense for the six months ended June 30, 2009 was $610,000, as comparedto $1.1 million for the six months ended June 30, 2008. This decrease isdue primarily to the reduction in exploration staff in the Dallas office due tothe relocation of our headquarters to Paris.

 

*Depreciation, depletion and amortization*

 

Depreciation,depletion and amortization expense for the six months ended June 30, 2009was $3.2 million or $19.68 per BOE produced, as compared to $2.3 million,or $12.41 per BOE produced for the six months ended June 30, 2008. Thisincrease is primarily due to the lower proved reserves assigned to our Frenchassets at December 31, 2008 due to depressed oil prices and was partiallyoffset by the decline in oil production of 24 MBbls for the six months ended June 30,2009 as compared to the six months ended June 30, 2008.

 

*Impairmentof oil and gas properties*

 

For the six months ended June 30, 2009, we incurred an impairmentcharge in Turkey of $5.3 million which was a result of a decline in the fairmarket value of the Company’s interest in South Akcakoca Sub-Basin assets.  The fair market value decline was due to a25% reduction in the posted sales price of natural gas produced in Turkeyannounced on May 1, 2009.

 

At June 30,2008, we recorded an impairment to oil and gas properties totaling $53.5million. We review our proved and unproved oil and natural gas properties forimpairment on an annual basis or whenever events and circumstances indicate apotential decline in the recoverability of their carrying value. As explainedbelow, our review at June 30, 2008, indicated a potential decline in therecoverability of our South Akcakoca Sub-Basin and Trinidad assets.

 

The impairmentcharge in Turkey is a result of us entering into a Letter of Intent to sell a26.75% interest in the  South AkcakocaSub-Basin properties for $80.3 million. This sale price indicates that the fairvalue of our 36.75% working interest was $110.3 million. The net book value ofthe South Akcakoca Sub-Basin asset at June 30, 2008 was $155.0 million,resulting in an impairment of $53.5 million.

 

The impairmentcharge of $2 million for the undeveloped leasehold costs in Trinidad, was dueto management’s decision to exit Trinidad and discontinue our association withour registered agent in the country.

 

*General and administrative beforestock compensation, cost incurred due to resignation of former officers andcosts associated with the Dallas office/relocation of headquarters*

 

Generaland administrative expense, not including stock compensation expense, cost incurred due to the resignation offormer officers and the costs associated with the relocation of thecorporate headquarters from Dallas, Texas to Paris, France, was$4.3 million for the six months ended June 30, 2009 compared to$6 million for the six months ended June 30, 2008. This decrease isprimarily due to the reduction in staff of the Dallas office in 2009 due to therelocation of our corporate headquarters to Paris, France.

 

*Stock compensation expense*

 

Stockcompensation expense was $2.2 for the six months ended June 30, 2009compared  to $1.6 million for the sixmonths ended June 30, 2008. This increase is primarily due to the changein the structure of Board compensation, whereby directors receive a greaterportion of their compensation in stock rather than cash, and a stock bonus thatwas granted to foreign office employees. The immediate vesting of grants made to employees in the Dallas officethat have been terminated, has been classified as “Cost associated with theDallas office/relocation of corporate headquarters from Dallas, Texas to Paris,France.”

 

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*Costincurred due to resignation of former Executive Officers*

 

The Company and Nigel Lovett, our former President and ChiefExecutive Officer, entered into a Separation and Mutual Release Agreement (the “LovettRelease”) in connection with his resignation from the Company in January 2009.Pursuant to the Lovett Release, Toreador amended certain terms and conditionsof Mr. Lovett’s 2008 employment agreement (the “2008 Employment Agreement”)with Toreador. The terms of the 2008 Employment Agreement, as amended, providefor Toreador to:  (i) pay Mr. Lovett all unpaid compensationearned but not paid, (ii) pay Mr. Lovett certain severance paymentstotaling $720,000 to be paid in 24 equal monthly installments, (iii) issue90,000 shares of Toreador common stock to Mr. Lovett, and (iv) vest6,800 shares of Toreador restricted stock held by Mr. Lovett.  The cost associated with the Lovett Releasetotaled $832,000, which was recorded in the first quarter of 2009.

 

In June 2008,Michael FitzGerald resigned as Executive Vice President - Exploration andProduction and Edward Ramirez resigned as Senior Vice President - Explorationand Production. Their Separation and Release Agreements provided for (i) eachto receive one year of salary which together resulted in an expense of$600,000, and (ii) for Mr. FitzGerald the immediate vesting of 5,000shares of restricted stock grants and for Mr. Ramirez the immediatevesting of 7,000 shares of restricted stock grants which together resulted inan expense of $35,000.

 

Inaddition in June 2008, three other employees resigned, which collectivelyresulted in an additional $304,000 of expense.

 

*Cost associated with the Dallas office/ relocation ofcorporate headquarters from Dallas, Texas to Paris, France*

 

Forthe six months ended June 30, 2009 we had $3.4 million of costs associatedwith the Dallas office/ relocation of our headquarters to Paris, France. Themajor components are: 1) salaries and wages associated with Dallas officeemployees $969,000; 2) severance payments $1.4 million; 3) corporaterestructuring expenses $626,000; 4) travel associated with Dallas officeemployees $312,000 and 5) Dallas office rent $137,000.  For the six months ended June 30, 2008,we did not have any such relocation costs.

 

*Gain on the sale of properties and other assets*

 

Forthe six months ended June 30, 2009 we recorded a gain on the sale ofproperties of $121,000. The gain is a result of the sale of a royalty interestin producing properties located in Canada. These properties had a zero costbasis and were acquired in connection with the acquisition of Madison Oil in2003. For the six months ended June 30, 2008 we did not have any propertyor other asset sales.

 

*Loss on oil and gas derivative contracts*

 

Losson oil and gas derivative contracts for the six months ended June 30, 2009was zero, as compared to $4.2 million for the six months ended June 30,2008. The loss in 2008 represents the recognized loss on the commodityderivative contracts with Total Oil Trading. Presented in the table below is asummary of the contracts entered into:

 

| **Type** | ** ** | **Period**                                       | ** ** | **Barrels** | ** ** | **Floor** | ** ** | **Ceiling** | ** ** | **Loss** | ** ** |
|----------|------------|--------------------------------------------------|------------|-------------|------------|-----------|------------|-------------|------------|----------|------------|
| Collar   |       | January 1 —  March 31, 2008  |       | 48,000      |       | $         | 84.75      |        | $          | 92.75    |       | $ | 19 |   |
| Collar   |       | April 1 —  June 30, 2008     |       | 48,000      |       | $         | 92.25      |        | $          | 100.25   |       | 2,239 |   |
| Collar   |       | July 1 —  September 30, 2008 |       | 48,000      |       | $         | 91.75      |        | $          | 99.75    |       | 1,953 |   |
|     |       |                                             |       |        |       |      |       |        |       | $        | 4,211      |   |

 

*Foreign currency exchange gain (loss)*

 

Werecorded a loss on foreign currency exchange of $557,000 for the six monthsended June 30, 2009 compared with a gain of $1 million for the sixmonths ended June 30, 2008. This decrease is primarily due to theweakening of the Hungarian Forint, which was partially offset by thestabilization of the Euro in the first six months of 2009 as compared to thecomparable period  2008.

 

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*Gain on the early extinguishment of Convertible Notes*

 

In April 2009, we repurchased $16.7 million principal amount ofthe Notes on the open market and through privately negotiated transactions for$12.7 million plus accrued interest and prepaid loan fees of $650,000.  This repurchase resulted in a gain of $3.4million on the early extinguishment of debt which was recorded in the secondquarter of 2009.  We intend to continueto buy back a portion of the currently outstanding Notes in the open market orin privately negotiated transactions, subject to market conditions, applicablelegal requirements and other factors.

 

*Interest and other income*

 

Interestand other income was $558,000 for the six months ended June 30, 2009 ascompared to interest and other income of $464,000 for the six months ended June 30,2008.  The change is primarily due toaverage cash balance being higher for the six months ended June 30, 2009compared to the six months ended June 30, 2008.

 

*Interest expense, net of interest capitalized*

 

Interestexpense was $1.9 million for the six months ended June 30, 2009, ascompared to $2 million for the six months ended June 30, 2008. Thisdecrease is due to the retirement of $22.7 million in face value of the 5%Convertible Senior Notes since June 30, 2008.

 

*Discontinued operations*

 

In the fourthquarter of 2008 and during the first quarter of 2009, Toreador farmed out orsold all of its working interests in Romania to three different companies andclosed its office; thus, we no longer have any operational involvement inRomania.  All revenues and expensesassociated with the Romanian operation for the six months ended June 30,2009 and 2008 have been included in discontinued operations.

 

In February 2009,the Board of Directors authorized management to retain Stellar Energy Advisors,based in London, UK, to manage a process to monetize its wholly-owned subsidiary,Toreador Turkey Limited, including the Company’s remaining assets in Turkeyincluding the 10% interest in the SASB, in addition to the onshore production,and 2.2 million net acres in exploration licenses that the Company currentlyholds in Turkey. All revenues and expenses associated with the Turkishoperation for the three months ended March 31, 2009 and 2008 have beenincluded in discontinued operations.

 

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The results of operations of assets in Romania and Turkey have beenpresented as discontinued operations in the accompanying consolidatedstatements of operations. Results for these assets reported as discontinuedoperations were as follows:

 
| ** **                                              | ** ** | **Six  Months Ended********June 30,** | ** ** |
|---------------------------------------------------------|------------|--------------------------------------------|------------|
| ** **                                              | ** ** | **2009**                                   | ** ** | **2008** | ** ** |
| Revenue:                                                |       |                                       |       |   |   |
| Oil and natural gas sales                               |       | $                                          | 2,913      |   | $ | 14,008 |   |
| Operating costs and expenses:                           |       |                                       |       |   |   |
| Lease operating expense                                 |       | 503                                        |       | 3,835 |   |
| Exploration expense                                     |       | 230                                        |       | 811 |   |
| Depreciation, depletion and amortization                |       | —                                     |       | 17,623 |   |
| Impairment of oil and natural gas properties            |       | 5,300                                      |       | 53,479 |   |
| General and administrative expense                      |       | 1,524                                      |       | 1,257 |   |
| Gain on sale of properties and other assets in  Romania |       | (5,846                                     | )          | — |   |
| Total operating costs and expenses                      |       | 1,711                                      |       | 77,005 |   |
| Operating income (loss)                                 |       | 1,202                                      |       | (62,997 | ) |
| Other income (expense)                                  |       |                                       |       |   |   |
| Foreign currency exchange gain                          |       | 3,319                                      |       | 322 |   |
| Interest and other income                               |       | 314                                        |       | 73 |   |
| Loss on early extinguishment of debt                    |       | (4,881                                     | )          | — |   |
| Interest expense                                        |       | (23                                        | )          | (2,235 | ) |
| Net loss before income taxes                            |       | (69                                        | )          | (64,837 | ) |
| Income tax benefit                                      |       | —                                     |       | 2,891 |   |
| Loss from discontinued operations                       |       | $                                          | (69        | ) | $ | (61,946 | ) |

 

Thefollowing tables present production and average unit prices for Turkey:

*** ***
| ** **      | ** ** | **For the Six********Months Ended********June 30,** | ** ** |
|-----------------|------------|----------------------------------------------------------|------------|
| ** **      | ** ** | **2009**                                                 | ** ** | **2008** | ** ** |
| **Production:** | ** ** | ** **                                               | ** ** | ** ** | ** ** |
| Oil (MBbls):    |       |                                                     |       |   |   |
| Turkey          |       | 25                                                       |       | 28 |   |
| Gas (MMcf):     |       |                                                     |       |   |   |
| Turkey          |       | 196                                                      |       | 976 |   |
| MBOE:           |       |                                                     |       |   |   |
| Turkey          |       | 58                                                       |       | 191 |   |

 
| ** **         | ** ** | **For  the Six********Months Ended********June 30,** | ** ** |
|--------------------|------------|-----------------------------------------------------------|------------|
| ** **         | ** ** | **2009**                                                  | ** ** | **2008** | ** ** |
| **Average Price:** | ** ** | ** **                                                | ** ** | ** ** | ** ** |
| Oil ($/Bbl):       |       |                                                      |       |   |   |
| Turkey             |       | 44.69                                                     |       | 102.05 |   |
| Gas ($/Mcf):       |       |                                                      |       |   |   |
| Turkey             |       | 9.18                                                      |       | 9.98 |   |
| $/BOE:             |       |                                                      |       |   |   |
| Turkey             |       | 50.62                                                     |       | 66.09 |   |

 

Oiland natural gas sales from discontinued operations for the six months ended June 30,2009 were $ 2.9 million, as compared to $14 million for the six monthsended June 30, 2008. This decrease is primarily due to the sale ofour  26.75% interest to Petrol Ofisi andthe $15.47 per BOE decline in oil and natural gas prices.

 

***Other comprehensive income***

 

Themost significant element of comprehensive income, other than net income, is foreigncurrency translation. For the six months ended June 30, 2009, we hadaccumulated an unrealized loss of $2.2 million, after reclassifying $5.3million to discontinued operations associated with the exiting of Romania, ascompared to an unrealized income of $4.8 million for the six months ended June 30,2008.  This is primarily due to thestabilization of the U.S. Dollar compared to the Euro.

 

Thefunctional currency of our operations in France is the Euro. The functionalcurrency in Turkey and Hungary is the U.S. Dollar. The exchange rates at June 30,2009 and 2008 were:

 
| ** **       | ** ** | **June 30,** | ** ** |
|------------------|------------|-------------------|------------|
| ** **       | ** ** | **2009**          | ** ** | **2008** | ** ** |
| Euro             |       | $                 | 1.4134     |   | $ | 1.5764 |   |
| New Turkish Lira |       | $                 | 0.6539     |   | $ | 0.8158 |   |
| Hungarian Forint |       | $                 | 0.0052     |   | $ | 0.0066 |   |

 

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***Off-balance sheet arrangements***

 

Wehave no off-balance sheet arrangements that have or are reasonably likely tohave a current or future material effect on our financial condition, changes infinancial condition, revenues or expenses, results of operations, liquidity,capital expenditures or capital resources.

 

**ITEM 3.*  QUANTITATIVEAND QUALITATIVE DISCLOSURES ABOUT MARKET RISK***

 

Therehave been no material changes in the Company’s market risk during the sixmonths ended June 30, 2009. For additional information, refer to themarket risk disclosure in Item 7A as presented in the Company’s 2008Annual Report on Form 10-K which was initially filed with the SEC on March 16,2009 and amended on April 16, 2009.

 

**ITEM 4.*  CONTROLSAND PROCEDURES***

 

**Evaluationof Disclosure Controls and Procedures**

 

Wemaintain disclosure controls and procedures (as defined in Rules 13a-15(e) and15d-15(e) under the Exchange) that are designed to provide reasonableassurance that the information required to be disclosed by us in reports filedunder the Exchange Act is recorded, processed, summarized and reported withinthe time periods specified in the rules and forms of the SEC.

 

We carried out an evaluation, under the supervision and with theparticipation of our management, including our Chief Executive Officer andSenior Vice President — Chief Financial Officer of the effectiveness ofour disclosure controls and procedures as of the end of the period covered bythis quarterly report. Based on that evaluation, our Chief Executive Officerand Senior Vice President — Chief Financial Officer concluded that ourdisclosure controls and procedures as of June 30, 2009 were effective.

 

**Changesin Internal Control over Financial Reporting**

 

In thequarter ended June 30, 2009, due to the announced relocation of theheadquarters to Paris, France, we eliminated three positions in our accountingand finance department. The responsibilities and duties of these individualswere assumed by the remaining personnel. Management believes that the changedoes not materially affect our system of internal control due to compensatingcontrols that are currently in effect.

 

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**PART II.OTHER INFORMATION**

 

**ITEM 1.*  LEGALPROCEEDINGS***

 

See Note 11, which isincorporated into this “Item 1. Legal Proceedings” by reference

 

**ITEM 1A.* RISK FACTORS***

 

There have been no material changes to therisk factors previously discussed in the Company’s annual report on Form 10-Kfor the year ended December 31, 2008, which was initially filed with theSEC on March 16, 2009, and was amended on April 16, 2009.

 

**ITEM 4.****SUBMISSION OF MATTERS TO A VOTEOF SECURITY HOLDERS**

 

Our Annual Meeting of Stockholders was held onJune 4, 2009.  There were 21,052,344shares entitled to vote at the meeting as of April 7, 2009, the recorddate.

 

The following nominees were elected asdirectors, each to hold office until his or her successor is elected andqualified, by the vote set forth below:

 

To elect members of the Board of Directors:

 
| **Nominee**                | ** ** | **Votes For** | ** ** | **Votes Withheld** | ** ** |
|----------------------------|------------|---------------|------------|--------------------|------------|
| Julien  Balkany            |       | 15,791,460    |       | 569,954            |       |
| Nicholas  Gay              |       | 15,429,294    |       | 932,120            |       |
| Peter  J. Hill             |       | 14,224,495    |       | 2,136,919          |       |
| Adam  Kroloff              |       | 15,479,417    |       | 881,997            |       |
| Craig  M. McKenzie         |       | 15,796,197    |       | 565,217            |       |
| Ian  Vann                  |       | 15,481,017    |       | 880,397            |       |
| Herbert  C. Williamson III |       | 14,274,792    |       | 2,086,622          |       |

 

The selection by the Company’s AuditCommittee of Grant Thornton, LLP as the Company’s independent registered publicaccounting firm for the year ending December 31, 2009 was ratified by thevote below:

 

| **Votes  For** | ** ** | **Votes  Against** | ** ** | **Votes  Abstaining** |
|----------------|------------|--------------------|------------|-----------------------|
| 14,339,926     |       | 87,134             |       | 1,934,354             |

 

**ITEM 6.*  EXHIBITS***

 
| **Exhibit********Number** | ** ** | **Description**                                                                                                                                                                                                          | ** ** | **Incorporation  by Reference** |
|---------------------------|------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|---------------------------------|
| 31.1                      |       | Certification of  Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted  pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.                                                           |       | Filed Herewith.                 |
|                      |       |                                                                                                                                                                                                                     |       |                            |
| 31.2                      |       | Certification of  Senior Vice President — Chief Financial Officer pursuant to 18 U.S.C.  Section 1350, as adopted pursuant to Section 302 of the  Sarbanes-Oxley Act of 2002.                             |       | Filed Herewith.                 |
|                      |       |                                                                                                                                                                                                                     |       |                            |
| 32.1                      |       | Certification of  Chief Executive Officer and Senior Vice President — Chief Financial Officer  pursuant to 18 U.S.C. Section 1350, as adopted pursuant to  Section 906 of the Sarbanes-Oxley Act of 2002. |       | Filed Herewith.                 |

 

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**SIGNATURES**

 

Pursuantto the requirements of the Securities Exchange Act of 1934, the Registrant hasduly caused this Form 10-Q report to be signed on its behalf by theundersigned thereunto duly authorized.

 
|                 | TOREADOR  RESOURCES CORPORATION                            |
|----------------------|------------------------------------------------------------|
|                 |                                                       |   |
| August 7,  2009 | /s/  Craig  M. McKenzie                          |
|                 | Craig M.  McKenzie                                         |
|                 | President and  Chief Executive Officer                     |
|                 |                                                       |   |
| August 7,  2009 | /s/  Charles  J. Campise                         |
|                 | Charles J.  Campise                                        |
|                 | Senior Vice  President — Chief Financial Officer |

 

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